When Mortgages Turn Nasty!

By Cliff D'Arcy | 23 July 2003

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"Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it."

The implications of this 'wealth warning' are frightening. Until you've completely paid off your mortgage, your lender owns your home. If you can't meet your monthly repayments for an extended period, your lender will take steps to repossess your house and sell it.

Of course, if you have serious long-term payment problems, you could beat your lender to the drop by selling your home and redeeming your mortgage. However, this isn't an attractive option if you have little or no equity (the difference between the value of your home and your mortgage), as you could be left with nothing.

These factors are responsible for the majority of mortgage arrears (see this article for more detail): financial mismanagement; reduced income (loss of overtime or bonuses); redundancy or unemployment; accident, sickness or injury; and divorce or relationship breakdown.

So, apart from friends, relatives and other good Samaritans, to whom can you turn when you're out of work and your home loan is becoming a burden?

Forget about government help!

If your mortgage was taken out after 1 October 1995, you get no help with your repayments for 39 weeks - that's nine months! (Although the over-60s receive help from day one.) From then on, the state pays only your mortgage interest, so you'll face a shortfall if you have a repayment mortgage. Sadly, you get no help with mortgage endowments, ISAs and other savings and protection products linked to your mortgage.

This state benefit is called Income Support for Mortgage Interest (ISMI) and is normally paid direct to your lender every four weeks. However, because it is calculated using a standard interest rate (and not the actual rate you pay, unless your rate is lower), four out of five ISMI claimants receive payments that are less than their mortgage repayments. Even worse, help with mortgage interest is limited to the interest on £100,000, so people with larger loans face shortfalls on the remainder. In addition, only homebuyer loans qualify for ISMI, so second loans (for home improvements and so on) aren't covered.

Alternatively, if your mortgage was taken out before 2 October 1995 - and you haven't made any material changes to it since then - you get no help with your repayments for eight weeks. Thereafter, you get half the interest for 18 weeks and the full ISMI benefit from week 27. This rate also applies to homeowners who have been abandoned by their partners or widowed, carers, those in custody (!) and those refused payment under a mortgage payment protection insurance or similar policy.

Finally, here's another huge hurdle: ISMI is means tested. You can't claim any means-tested benefit if you have a partner who works 24 hours a week or more, or savings of £8,000+. (A partner means your spouse or someone living with you as if you were married.) Also, if you have savings of between £3,000 and £8,000, your entitlement to means-tested benefits reduces on a sliding scale to zero. Marvellous, isn't it?!!

So, you can see that ISMI is a dreadful safety net for homeowners, and that's because the government wants us to fend for ourselves. In Part Two, I'll explain how you can reduce the risks of homeownership.

More:Part Two | Part Three | Dealing With Unemployment.