Improving advice and protection

This content applies to England only.

Given the current climate of rising repossessions, Shelter believes that advice and protection for home buyers need to be urgently improved.

The current safety net is evidently not fit for purpose.

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 people need is sometimes not available when they need it.

Holes in the existing safety net

Shelter believes the current safety net available to mortgage borrowers falling into arrears is inadequate, having been cut back in stages up until the most recent restrictions in 1995.

Public provision through ISMI

The main state safety net for struggling mortgage borrowers is the ISMI (Income Support for Mortgage Interest) scheme. However, Shelter believes ISMI is inadequate because:

• most borrowers have to wait 39 weeks before support under ISMI comes into effect, by which time many of them will have been repossessed
• ISMI pays only on the first £100,000 of a mortgage loan, and then only on the interest element of the repayments, not the capital repayments.

Private insurance schemes

Given the absence of a secure state-sponsored safety net, private insurance products are offered as a means by which individual households can manage their borrowing risks for themselves. Mortgage Payment Protection Insurance (MPPI) policies insure mortgage borrowers against future drops in income. However, recent studies have found that only about one quarter of mortgages are covered by MPPI, and that those borrowers who are not insured tend to be those least able to cope with future drops in income.

MPPI policies have also been criticised for not covering many common reasons for falling behind with repayments, and concerns have been expressed about possible mis-selling. The payment protection insurance sector was recently criticised in a study by the Office of Fair Trading and referred to the Competition Commission.

Buy and Lease back schemes

There is currently widespread concern over bad practice among some companies running 'buy and lease 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. But in reality the company will 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 is nothing to stop the new owner evicting them, leaving them homeless.

Shelter's view

Better early advice

Shelter believes the Government and mortgage lenders should increase funding for early stage, 'preventative' financial advice. Many individuals and families would 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, rather than the customers', best interests.

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 instalments. 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 give backing to the civil justice council's proposed pre-action protocol for mortgage arrears, which would allow judges to dismiss repossession applications where the lender cannot demonstrate that they have explored all other possible options first.

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: it should 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 are covered against common causes of inability to meet 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, ISMI, 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.[1]

Reform of buy and lease back schemes

Shelter supports buy and lease back 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 the option to buy back all or part of the equity if their circumstances recover. Alternatively, a national mortgage rescue scheme could be set up by the Government 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.

Better co-ordination to prevent homelessness

Shelter would support legislation requiring lenders to inform local authority housing services when initiating repossession proceedings, so that homelessness prevention services can be better co-ordinated.

[1] Stephens M, Dailly M, Willcox S, Developing Safety Nets for Homeowners, Joseph Rowntree Foundation, 2008