Regulated Borrowing

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In (part 5) of this series, we looked at non regulated borrowing on Buy to Let property for the rental market and the problems that the coronavirus pandemic has presented to landlords who are finding that their tenants are not paying rent. We also looked at some of the steps that could be taken to properly review the situation where the income from rent is no longer covering the upkeep costs of the property.

In this article, we look at the regulated side of borrowing where householders are finding the cost of servicing the mortgage on their main residential home is stating to cause concern. Although this may be because of factors other than the mortgage itself, it does not detract from the fact that serious consequences could result if the monthly repayments on the mortgage are not paid on time.

Possible causes for mortgage defaulting

There are many situations that could lead to someone defaulting on their mortgage, some of which are touched on below. This is a situation that should be avoided at all costs, as the consequences for this happening are serious and could last for many years.

Loss of income – During this pandemic, many people have lost their jobs or have had to accept a reduced income through their employer or because of a downturn in their own business.

Relationship breakdown – If one partner intends to retain the property then the additional outgoings can place a burden on the available finances.

Over Spending – Letting spending run away with itself, through over use of credit cards and buy now pay later schemes, can quickly eat into the family budget.

Tenant protection – Where investment in the buy to let market has taken place, the tenant protection scheme may have destroyed income, putting a severe strain on paying the mortgage on your residential property.

Wrong Property purchase – Perhaps it is simply that the property is too expensive to be supported, while maintaining the social lifestyle you have been enjoying. In this case, downsizing could be a straightforward fix.

Avoiding mortgage default

In all debt building situations discussed in this series, including pending mortgage default, one of the first things that should be done it to set out clearly and honestly all of your income and expenditure. With that properly completed, in proper detail, you will be in a good position to properly assess your overall financial situation and be able to see, and to make sound judgements on, any areas where money can be saved.

If you are not sure of how to do this and you are able to use a simple spreadsheet, we can provide you with our free household finances planning spreadsheet which will cover most items and provide you with space to insert items to reflect your own specific situation. To learn more about this spreadsheet and request a copy, please see (Part 8) of this series.

Likely Scenarios

Having completed this task, you should now have a clear picture of where your overall finances stand. There are three likely scenarios:

• Overspending – You will have identified areas where you are overspending by a sufficient amount to relieve the debt pressure you were experiencing. If you apply the savings identified and refrain from further non essential purchases, your problem should be resolved.
• Debt Consolidation – You may have identified that you have a number of very high interest rate loans, which if they could be replaced with a single loan at a much more affordable rate, then the problem might be
• Non viable position – If you have found that your budget is so tight that nothing can be saved or refinanced, then it will be important to seek help at the earliest possible time and not simply allow the situation to deteriorate further. There are many good companies out there that specialise in helping people to get out of debt.  They can often reach  agreement with your creditors to cancel part of your debts or arrange for only a small amount to be paid each month, enabling you to overcome your difficulties.

A word of warning though, there are also some companies in this market to be avoided so it is important before engaging with a debt management company to properly research that company to make sure that they are properly qualified and regulated.

Regulated mortgage lending criteria Problems

Apart from the problems identified above, it may be that it is a change in the terms of the loan that the lender is offering you that could be at the heart of the matter. This might be caused through the following.

Credit score reduced – Lenders take account of a borrowers credit rating when offering a mortgage.  If you credit rating has reduced and you are trying to remortgage, the lender might apply a much higher interest rate or even refuse to lend.

Property down valued – Again, if you are remortgaging and find that your property has been down valued, you may not be able to raise the amount you need or you may no longer meet the lenders loan to value ratio for the loan. This might lead to requiring additional cash or paying a higher interest rate on the loan.

Business start up – You may have started a business after you took out the mortgage and now as you come to remortgage, that the lender refuses to lend as you do not have sufficient years accounts for the business to meet the lenders criteria.