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Default period for mortgages to send rates rocketing

mortgageA new EU directive is currently being forced through the European Parliament which, if passed, could mean even more pressure on UK homeowners struggling with their mortgage repayments.

The proposed change would see the default period drop from six months to just three, increasing costs for banks and forcing them to start repossession proceedings far earlier.

The move comes as European finance ministers fear the consequences of another banking collapse and are trying to shore up the sector, making finances more secure.

However, the decision to push through the obscure banking rule as part of the ‘harmonisation’ vision for the EU, would see each country with the same rules. Many of the 27 members operate a far stricter policy than the UK, which is why Brits would see the amount of time they are given halved. Italians would also feel the impact from the new rules, but only for their public sector borrowers and the Bank of Italy has predicted the effect will be insignificant.

In the UK, lenders allow anyone who has fallen into arrears 180 days before they are classed as officially in default. Changing the timescales will give bankers less time to help customers reach a viable solution – a process officially known as forbearance – and could end up with thousands more people defaulting when a satisfactory conclusion could have been reached, given more time.

According to statistics from the Bank of England, around 0.5% of the 13.6 million mortgages in the UK are already in forebearance, with an additional 1.2 per cent in arrears. The Bank has estimated that if forebearance was not available, the arrears rate would rocket by 50%.

And with the number of repossessions being forcibly pushed up by the new rules, it means that bankers will see increased costs, with an estimated 15-20% increase on current levels. This will, inevitably, either mean the charges are passed on to customers, or more likely, bankers will also tighten their lending criteria even further. This could potentially lead to even fewer customers being able to borrow money and depressing the already stagnant UK housing market.

European ministers supporting the change have said that the same rules for everyone would mean that regulators would be able to set uniform capital requirements, currently a difficult task, given the differences in lending.

A spokesperson for Michael Barnier, the internal markets commissioner for the European Union, said that they were aiming for a ‘level playing field for all financial institutions’ and were trying to achieve ‘consistency across the EU.’

However, the British Banking Association has said that slashing the time available to just 90 days was a ‘top concern’ for them from the draft reform being put forward by the EU. A spokesman for the body said that cutting back on the number of days was not ‘reflective’ of the true risk of default for the underlying core borrowing portfolio.

This view was also shared by the head of risk, Clive Stanton, at the Rule Financial group, who described the proposal as ‘very worrying’ and said it could render entire blocks of business as ‘unviable.’

European Parliament has not yet given the changes the go-ahead but if they do, it is anticipated that the new rules will come into effect by next year. However, a former regulator who now works for Deloitte, David Strachan, warned that this change is likely to be the first of many. Mr Strachan said that the proposal was merely an ‘indication of maximum harmonisation,’ adding there was likely to be ‘more of that to come.’

For debt advice, speak to Baines and Ernst.

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