A way out of mortgage peril?

MONEY TALK
By Milena Atanassova
Independent Financial Adviser, Rickmann Tooze

With house prices falling in some areas, a leading independent financial adviser (IFA) tells BBC News Online how best to avoid mortgage misery.

The continuous cuts in interest rates coupled with growing wealth have made us want better and bigger everything - cars, holidays, houses.

Of course all of these need financing somehow and as we have all found ourselves "house rich, cash poor" what better way to do this than by increasing the outstanding loan on our properties.

But suppose prices of property fall - that could throw hundreds of thousands of homeowners into negative equity.

Although it is worrying simply talking about this situation, it is important to note that negative equity is only a problem if the homeowner wishes to move while the negative equity situation prevails.

If not then the negative equity is only a "paper" loss and if homeowners continue to pay their mortgage in the usual way the problem could be gradually removed by future house price increases.

Mortgage impact

With a repayment mortgage, the negative equity situation may resolve itself more quickly than with an interest-only mortgage because the loan is being repaid gradually.

Since it is rarely best advice to surrender a policy, this is a strategy to avoid if at all possible

Some borrowers faced with negative equity in their property have resorted to raising money from other sources to bridge the gap.

Some have even surrendered their repayment vehicles like endowments or unit trusts, so that the required capital is raised.

Since it is rarely best advice to surrender a policy, this is a strategy to avoid if at all possible.

Recent developments on the mortgage market also provide another way of tackling this.

Nowadays most lenders offer flexible mortgages whereby borrowers can make regular monthly overpayments without incurring penalties.

Following this route would mean repaying any outstanding mortgage amount early, thus reducing any existing shortfall.

Job losses

Suppose property prices do not go down, but the economy does and as a result unemployment starts to rise.

Without regular income it is easy to fall behind on mortgage repayments.

Many borrowers could find Permanent Health Insurance cover a better bet

An unemployment and disability plan would definitely be of advantage.

Although in the recent past these plans were perceived to be very poor value for money there has been increased demand for cover from borrowers.

Having said this, the payout term for disability cover for example is only 24 months whereas in a case of redundancy it is only 12 months.

In addition, some plans start paying out only after a period of three months has passed.

Ill health

Many borrowers could find Permanent Health Insurance (PHI) cover a better bet.

For example, a non-smoking male of 23 years of age would expect to pay just over £13.58 per month for policy that would provide £900 per month if he suffered an accident or illness that forced him out of work.

At first this may seem a lot of money each month, however, it is still cheaper compared to the monthly premium of £35.55 disability and unemployment plan covering the same amount of monthly benefit.

It should be noted that the benefit under a PHI policy is potentially payable until age 60 if the disability proves to be permanent.

Should homeowners find themselves in financial difficulties they should contact their lender as soon as possible

The premium is also guaranteed, which means that there will be no premium increases until termination of the plan.

Sympathy code

Mortgage lenders generally face fewer problems with arrears as homeowners usually give high priority to the monthly repayment.

But regardless of this, should homeowners find themselves in financial difficulties they should contact their lender as soon as possible.

Early contact is a signal to the lender that the customer has a serious attitude to the problem and would like to address it.

The Mortgage Code, which most lenders are members of, requires lenders to consider cases "sympathetically and positively".

Professional debt counsellors can often bring about a swift solution by helping borrowers to take a logical approach to their obligations, ascertain priorities and make plans accordingly.

Depending on circumstances, the lender may be able to offer various courses of action including "arrears freezing", arrangements to overpay the normal monthly amounts for a specified period of time, and extend the mortgage term.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.