Cut early redemption charges for customers in arrears

Specialist mortgage broker The Mortgage Lender is urging lenders to drop early redemption charges (ERCs) for customers in arrears in a bid to cut repossessions - and to slash the £650m cost to the industry.

David Titmuss, Managing Director of The Mortgage Lender, is already in talks with lenders about an ERC cut, and says there's around 30,000 "mortgages in trouble" - and all the signs are that this year there will be a substantial increase over 2006's 17,000 home repossessions.

"The signs are that there will be four or five times as many repossessions in 2007 as the 6,000 there were in 2004 - maybe passing 1999's 29,990 figure," said David Titmuss.

"The share of household income a mortgage absorbs in 2007 is higher than in 2006 - up from 15.1% to 17.3% - which means people are getting into arrears more quickly.

"Because The Mortgage Lender speaks to thousands of people every month, we see and hear from borrowers who are finding themselves in difficult financial circumstances, so we're well-placed to gain a better view than most of the property finance sector, the challenges it is facing and how homeowners are affected by mortgage and ERC issues.

"Typically, we see scenarios such as somebody who has had an average mortgage of around £150,000 and falls into arrears after a year, leaving them with three options: continue defaulting, pay the arrears or, the most sensible - re-organise their finances.

"But if the customer remortgages he not only has to pay off interest and arrears, he is very likely to have to pay an early redemption charge - which could be £6,000 on a typical mortgage. In the end, with the other charges, that could climb to £10,000. Even in a healthy market his home is unlikely to appreciate that much so the customer is caught in a mortgage trap.

"The only way out is repossession - expensive, traumatic and often needless. Axing ERCs where a customer is in arrears would give everybody so many more options - lenders could remove a bad loan and avoid the cost of repossession, customers could reorganise their finances to reduce their monthly outgoings and, most importantly, a family could keep their home.

"We estimate that the average repossession costs the lender around £21,875 - the loss under market price at auction, plus the cost of auction and other charges - meaning that 30,000 repossessions in 2007 will cost the mortgage lending industry £656 million.

"If the early redemption charges were waived on all 30,000 repossessions
- giving everybody a potential way out (provided he has the income to support a new mortgage) - then the cost to the industry would be £180 million. That's a potential saving of more than £475 million, and a lot less cost and trauma to homeowners and lenders alike.

"ERCs are there to ensure so-called 'rate tarts' don't move immediately a better deal comes along after taking advantage of an existing lender. They are not there to trap people in financial difficulties - so they should be dropped where people are in serious arrears.

"We believe that the lenders did not plan this trap, it is a by-product and in principle a sensible financial tool. If lenders scrap or slash the ERC for serious arrears customers it would make a massive difference to the cost of mortgages and, in particular, to first-time buyers.

"We need to radically change the way property finance works in the UK - we are already in talks with one lender about a 50-year mortgage, and we have opened discussions with others about cutting ERCs for those in arrears."