Mortgage costs and repossessions could soar due to an obscure EU directive which is going to be pushed through the European Parliament. Mortgage lenders in the UK will be forced to begin repossession proceedings when the borrower falls behind with their repayments by only three months instead of the usual six months which is how it usually works.
What this means is that thousands of homeowners in the UK will have to give the keys back to their lenders. The knock-on effect of this will be the risk of defaulting being higher which in turn means that it will cost between 15% to 20% more to lend. Lenders will either pass this cost onto homeowners or will make sure that fewer mortgages are actually available.
The EU has brought in this directive in order to make banks safer and to reduce the risk of another financial crisis in the future. However the reform is hidden in an obscure clause within a bank capital directive even though it will have a wide ranging impact on thousands and thousands of homeowners who often fall into mortgage arrears. Banks will also be given less time to arrange restructure payments, which they are doing at present to help homeowners, because it is thought that this will stop owners defaulting. This process is known as forbearance.
These changes are likely to come into effect next year and some mortgage brokers are speculating that if this law does come into effect then the slack that the lenders offer homeowners at present will be halved and once implemented then thousands of homeowners will instantly have repossession procedures issued against them. This added pressure will result in lenders putting the interest rates up to compensate for this and they will also decide to tighten their lending criteria, all this is not good news in a housing market which is already struggling. The number of house purchases has dipped significantly since the economic downturn, mainly because of the lack of mortgages available to people and if borrowing costs become more expensive then the market could become even more depressed.
At the moment homeowners have a 90 day period in order to agree a refinance deal for their mortgage or the choice to move to a smaller home. Alarmingly when the Financial Times contacted four different consumer groups about the change to the system they had not heard anything about it, even though it could become law within months. There are 13.6million mortgages in Britain and of these 1.2% is in arrears because homeowners are struggling to keep up with their repayments. The reason that the law is being brought in by the EU is so that mortgage laws are identical across the Continent, the reason given is that it will make it easier for homeowners to compare deals.
Once this law is enforced many believe that the repossession rate will soar because all it will take will be for someone in the home to lose their job and then struggle to find another. Just this simple delay of a few months means that many homeowners will, without a doubt, lose their homes.
Fiona Davies is a director at The Property Fairy.
She has worked in the land and property sector for the last ten years.
All articles on the website are written uniquely by her.
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