IVA Holders Face Mortgage Problems

Many people who have had problems with personal insolvency are likely to face a double hit with interest rates in the next year.

People with Individual Voluntary Arrangements (IVAs) have to realise some equity in their properties to use the cash to help pay off their debts. The problem is that the new mortgage they will have to take out is likely to be at a higher rate than their current loan as rates have gone up, and in addition to that the credit crunch is affecting those with credit problems worse than others, so their new rates will be even higher.

IVAs have become popular as alternatives to bankruptcy. Those in financial trouble agree to a repayment scheme with their creditors. It reduces the amounts to be paid back, but at least the creditors get something for their agreement. They have been available for over 20 years, but have been used a lot more in the last five years. A lot of people are due to come out of their IVA in the next 12 to 18 months and will need to remortgage.

An analyst in the insolvency advice business said: “There is a problem here. People in an IVA will be remortgaging into something significantly more expensive. Not only are mortgage rates higher than when these people bought their houses, but they could well be classified as sub-prime - that is to say as riskier borrowers who need to be charged more to compensate for that risk.”

All IVAs contain a clause which states that borrowing for equity release must be ‘affordable’. If some people with an IVA claim they cannot affor the new mortgage, then lenders may be forced to write off the money it had expected.

Marketing director with leading debt advice company ClearDebt, Andrew Smith, said: “Banks have agreed to take this on the chin.”

The British Bankers’ Association said it had not heard of any if its members being concerned about a shortfall.

Rock Nationalisation Is Not The End Of Problems

The nationalisation of Northern Rock is not the end of the affair. The Government may like to think that handling the crisis as they did will help to prevent other similar problems happening in the future. They wanted to stop the effects of the crisis spreading to other parts of the financial system and have made loans and guarantees to the tune of £55bn to keep Rock alive.

However, there may well be other problems just waiting to come to the surface. The Government may also believe this, as its emergency legislation for Northern Rock extends for a period of 12 months – way beyond the time needed to deal with Rock alone.

A number of other businesses have confessed to problems of their own. Buy-to-let lender Paragon is looking for £287m of new capital from existing shareholders.

London Scottish Bank is selling off small parts of its business to stay afloat. Bradford & Bingley saw its shares fall to a record low of 1818p as it announced a large sub-prime write-off last week. It now claims to have enough financing to see it through the year.

The Prime Minister might like to think that problems in the UK began in the US with its own sub-prime crisis, but the problem is undoubtedly lapping at our shores. Housebuilders have seen a drop of 50% in sales of new homes, and the whole property sector sits under a huge black cloud. It is said that the commercial market may take another 15 months to recover.

Banks may react by calling in loans to bolster their balance sheets. Many are evidently doing as much as they can already by sending mortgage rates up – against the trend of the base rate, and who can blame them as Bank of England Governor Mervyn King advised them to boost their cash reserves.

It is inevitably the public who will pay for banks’ financial folly in the past few years, as lending conditions continue to tighten and the cost of loans continue to rise. The problems certainly aren’t over yet.

Banks Accused Of Profiteering

Evidence has shown that banks and building societies have raised their mortgage rates ahead of an expected cut in the Bank of England base rate on Thursday.

Not only have banks failed to pass on the cut from December, they have actually increased the average mortgage rate. The warning from financial experts is that most mortgage holders will fail to see benefits from further base rate cuts throughout 2008.

Over the past few weeks many lenders, including the biggest building society, Nationwide, plus the Royal Bank of Scotland and the Alliance & Leicester, have increased some of their mortgage rates.

Data from the Bank of England show how mortgage rates have increased. The current interest rate is 5.5%. When it was last at that level in May 2007, the average mortgage rate was 5.66%. After December’s cut to the same level, mortgage rates averaged 5.93%. On an interest-only loan of £150,000 this means a difference in repayment of £33.75 extra a month.

Chairman of the campaign group Independent Banking Advisory Service, Eddie Weatherill, said: “Over the last decade the banks have used interest rate changes to massage their own rates. When the official rate goes up, they are quick to move. When it goes down, they are slow to pass on the cut to their customers. It is profiteering and consumers end up the losers.”

Banks appear to have tried to use the changing interest rate as an excuse to rebuild their profits after they made such mistakes that led to the credit crunch last autumn.

The Bank’s rate was lowered in early December. Since then, ten lenders have increased some of their rates, and 19 have not cut rates on fixed rate mortgages.

The FSA is concerned for the 1.4m people coming off cheap fixed rates this year, who could face an increase of over £200 on their monthly mortgage bill.

CML Wants Rules To Guard Against Mortgage Fraud

The Council of Mortgage Lenders (CML) has called for a tightening of rules to prevent possible mortgage fraud concerning the sale of new-build city centre flats.

It says that the slowing housing market might tempt some developers to offer “incentives” to potential buyers. Such deals may include cash-back offers, which might actually increase the headline value of the flats. The result might be that they could grant excessive mortgages.

The CML’s fortnightly News and Views publication said: “In recent years, discounts and incentives have had the effect of making the real value of new homes less than transparent. This is bad news for genuine buyers and for lenders. Buyers may find themselves with a mortgage worth more than the property’s value, while lenders may find themselves exposed to fraud and the risk of loss.”

Prices are falling in many parts of the country, meaning that lenders do not want to be tricked into offering bigger mortgages than necessary, and are wary of developers’ sales tactics.

Recently built city centre flats have been losing value and may prove a subject of temptation for incentives. Some offers include the paying of legal fees and stamp duty, cash-backs, offers of free holidays, the supply of white goods or even the arrangement of reduced mortgage payments.

Professionals who do the conveyancing - typically solicitors - are supposed to tell lenders about deals, but they will not be able to do so if the incentives are hidden from them.

The problem was also discussed in last week’s Financial Risk Outlook from the Financial Services Authority.

CML spokesman Bernard Clarke, said it wanted developers to sign up for the codes of practice as both solicitors and valuers do. He said: “We want developers to uphold similar sorts of standards. We don’t think there is a lot of this going on. But lenders are concerned this area has been targeted.”

Nationwide Report House Price Falls For Third Month

The latest property price figures from Nationwide show a third month of falls, and the annual rate of house price inflation has fallen to its lowest level for more than two years.

Nationwide’s figures showed a 0.1% drop for the month in January, but this was less than the 0.4% drop in December, and also lower than forecasts from analysts for a fall of 0.3%.

However, the fall mean that the annual rate of house price inflation fell to 4.2% from 4.8% in December, and this was its lowest point since December 2005. The average house price is now down to £180,473 from £182,080 in December.

The three months to January showed a house price drop of 0.3%, compared with a 0.9% increase for the three months to December.

Senior Economist at Nationwide, Martin Gahbauer, commented: “The weakening trend in house prices during the last three months is consistent with the loosening in housing market conditions that has become increasingly evident in the data.”

The housing market is well and truly on a slowdown, as the Nationwide figures came on the back of figures from the Land Registry for December which showed a 0.4% fall, with seven out of ten regions seeing decreases in house prices.

The expectations that the Bank of England will cut interest rates next week will now increase with continuing evidence of a stagnating housing market. Most analysts expect the rate to be cut to 5.25%.

Other evidence of the cooling market came last week when mortgage approvals were reported by the Bank of England to be weaker than expected, posting their lowest reading since the current series began in 1999.

“This undoubtedly signals a continued cooling in annual house price inflation during the months ahead,” Gahbauer said.

Only the Halifax index has shown any increase in house prices recently, with an unexpected rise for December’s figures.

In February Clear Your Debts

Traditionally February is the month when people finally get to grips with the amount they have spent over Christmas, and start to clear up their outstanding bills. Banks and building societies play on this knowledge and increased the distribution of loan offers in the month.

Of course, as they know that people are looking around for extra cash, the rates they are offering are not the best at this time. Potential customers should look around for the best deal.

When paying off debts borrowers should try to pay off the one with the most expensive rate first. If it is possible to consolidate debts onto a lower rate, then that is a good plan too. Providers have not changed rates as the credit crunch has increasingly hurt them, but they have been more choosy about the customers they will lend to. Thus, if they consider you too high a risk – based on the information in your credit file – they will not lend to you.

Credit cards tend to be an expensive debt, so that is a good place to start when trying to consolidate your debts. Currently Virgin, Mint, Egg, Lloyds TSB and Abbey are all offer 0% interest on balance transfers for over 12 months. They all have a fee of up to 3% on whatever you borrow.

However, the number of people being granted credit cards on application has dwindled so nothing is guaranteed. If you do get a better credit card deal, be watchful of when the deal ends. If you fall into the regular interest rate it will probably be above 15%.

To avoid that you could consider a life-of-balance transfer card, which gives you a reasonable interest rate for ever on the transferred amount. At the moment he best is from Leeds BS with a rate of 5.9%, though it does have a fee of 2% of the amount you transfer.

Otherwise you could consider a fixed-rate loan. This will give regular repayments over a set period until your debt is paid off. The cheapest rate for a £5,000 or £10,000 loan is with Moneyback Bank, part of Alliance & Leicester, where the rate is 6.7% for those with the best credit, giving monthly repayments of £153 a month over three years for a £5,000 loan, and £195 for £10,000 over five years.

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