Improving advice and protection
This content applies to England only.
Shelter believes that advice and protection for home buyers is crucial.
Improving advice for home buyers
There are two points at which it is critical mortgage borrowers take up sound independent financial advice:
- at the outset, prior to taking on a mortgage loan
- at a future point, should the borrower be struggling to meet repayment commitments and falling into arrears.
Many mortgage borrowers are unaware of their options if they fall into arrears. Independent advice is particularly important to ensure that less experienced buyers, the vulnerable, and the financially insecure do not feel pressurised into taking decisions they may later regret.
Although most mortgage lenders' policies advise borrowers to obtain independent financial advice, such advice is not universally available. There are limits to eligibility for assistance based around income levels and capital, and independent advice services - such as Citizens Advice Bureaux and Shelter's free housing advice helpline - sometimes have long queues, which are not ideal for people in a stressful situation.
There is a real issue of capacity and funding among such advice providers, as at present the advice is sometimes not available when people most need it.
Help for borrowers
There are three Government schemes to help mortgage borrowers from falling into arrears. However, each scheme has its limitations.
Homeowners’ Mortgage Support (HMS)
Homeowners’ Mortgage Support is for borrowers who are unable to meet their payments because of a significant but temporary drop in income, for example those who have been made redundant. Interest payments can be delayed for up to two years to be repaid when the homeowner is back on their feet.
While HMS reduces the risk of repossession, it does not eliminate it. Homeowners are still at risk if they cannot afford the reduced payments, or the higher payments when they leave the scheme. HMS has been criticised for offering only temporary relief, and that delayed interest payments can accumulate. The scheme is also not offered by all lenders, meaning that some people will not benefit.
Those who are unlikely to recover financially in the longer term are not eligible for HMS, but may have other options available to them.
HMS is expected to end in 2011.
Support for Mortgage Interest (SMI)
Support for Mortgage Interest aims to help people claiming certain benefits such as income support, pension credit or income-based jobseekers’ allowance. People can get help to pay the interest on their mortgages and interest on loans taken out for repairs or improvements to their home.
Recent changes have been made to SMI. In October 2010, the rate at which SMI is paid was reduced from 6.08 per cent to the Bank of England average mortgage interest rate, which was 3.63 per cent. The waiting time has been reduced from 39 weeks to 13 weeks and help is now available on mortgages up to £200,000. A time limit of two years for claimants receiving income-based jobseekers’ allowance has also been introduced.
However, SMI pays only on the interest element of the repayments, not the capital repayments.
Mortgage Rescue Scheme (MRS)
The Government Mortgage Rescue Scheme is for the most vulnerable households at risk of losing their homes through repossession. Homeowners either sell part or all of their home to a housing association, and this is then rented back to them. MRS is aimed at those in priority need, such as households with dependents, the elderly and the disabled.
The Government aims to help up to 6,000 vulnerable households over two years, and in May 2009 the scheme was extended to include households in negative equity. [1]
The MRS was put into place in January 2009. So far almost 30,000 households have enquired about the scheme and more than 5,000 households have applied for support.[2]
Shelter welcomed the allocation of a further £200 million to support MRS in the Government's 2010 Spending Review.Mortgage Payment Protection Insurance (MPPI)
MPPI policies insure mortgage borrowers against future drops in income. However, recent studies have found that only about one quarter of all mortgages are covered by MPPI, and those borrowers who are not insured tend to be the ones least able to cope with future drops in income.
It may be three months or more before MPPI policies take effect, by which time arrears will have built up for many borrowers. MPPI policies have been criticised for not covering many common reasons for falling behind with repayments, and concerns have been expressed about possible mis-selling. In 2009 the FSA agreed a package of measures for consumers who had been mis-sold MPPI, with £60m allocated for refunds to be paid by June 2010.
Sale and rent back schemes
There has been widespread concern over bad practice among some companies running 'sale and rent back' schemes, where a company offers to buy a borrower's property when they are facing mortgage arrears, and then rents it back to them so they can stay in their home. Advertising for many of these mortgage rescue schemes states that they offer struggling borrowers a way of getting out of financial trouble, releasing equity from their property, and allowing them to stay in their homes. In reality the company would often buy the property at a price far below its full market value, and rent it back to the former owners on an assured shorthold tenancy, giving them no long-term security of tenure. After six months there was nothing to stop the new owner evicting them, leaving them homeless.
These schemes are now regulated by the FSA; however, Shelter recommends that homeowners exercise great caution before thinking about getting involved in any sale and rent back agreement. You should always get independent advice about both your finances and how your rights would be affected before you take action. Use our directory to find a local adviser.
Shelter's view
Better early advice
Shelter believes the Government and mortgage lenders should maintain funding for advice at an early stage, and provide 'preventative' financial advice. Many individuals and families benefit from such a service, teaching them the fundamentals of sound financial management and raising their confidence when considering financial offers from brokers and others who may be acting in their own best interests, rather than the customers'.
Responsible arrears management
Lenders must show responsibility when dealing with homeowners who get into difficulty with their mortgage payments, exploring ways in which the problem might be resolved, for example, by repaying the arrears in installments. Repossession action should be taken only as a last resort.The FSA should scrutinise lenders carefully to make sure that they are adhering to these standards of responsible behaviour.
In addition, the Government should review mortgage law and strengthen the pre-action protocol for mortgage arrears, to allow more sanctioning by judges.
Improved safety net for mortgage borrowers
Shelter believes the current safety net for mortgage borrowers struggling to meet repayments needs to be strengthened to include the following features:
- It should be realistic: and be able to cover the actual costs incurred by households in paying their mortgages when the household faces loss of income, rather than notional costs, and provide protection against those occurrences that actually account for the bulk of arrears cases.
- It should be balanced: to ensure households in financial difficulties get help to meet their mortgage payments, without providing perverse incentives for households to borrow recklessly.
- It should be simple and universal in its application: so that consumers don't have to navigate their way through the small print of contracts to discover exclusions and limits to their cover.
- It should be funded through a mixture of channels: with insurance payments being contributed by the Government, lenders and borrowers.
We recommend that the Government investigate the feasibility of such a system as a replacement for both the current welfare benefit payment SMI, and the private Mortgage Payment Protection Insurance (MPPI) market. In particular, we believe the Government should closely examine the Joseph Rowntree Foundation's proposals for a Sustainable Home Ownership Partnership, a block insurance fund that would pay out on a time-limited basis to homeowners in danger of repossession. [3]
Reform of sale and leaseback schemes
Shelter supports sale and leaseback schemes in principle, as a way of providing flexible tenure for those who can no longer afford to pay their mortgage. But these schemes must be regulated, to provide long-term security of tenure for former owners, and they should have the option to buy back all or part of the equity if their circumstances recover. Alternatively, a national mortgage rescue scheme like the one recently set up by the Government could be expanded to replace private schemes.
Longer-term fixed-interest-rate mortgages
Shelter welcomes the Government's proposed measures to improve the availability and affordability of longer-term fixed-interest mortgages. The Government should also explore measures to encourage the development of other types of mortgage product that transfer risk away from individual consumers.
[1] Frequently Asked Questions about the Mortgage Rescue Scheme, CLG, 2009
[2] Repossession and Repossession Prevention, Live Tables, Table 1303, March 2009 www.communities.gov.uk
[3] Stephens M, Dailly M, Willcox S, Developing Safety Nets for Homeowners, Joseph Rowntree Foundation, 2008
