The UK Government Intervenes as Rising Interest Rates Impact Mortgage Payments and Repossessions

Introduction

There has been some recent relief for homeowners when the Bank of England left interest rates unchanged at 5.25% on 21 September following 14 consecutive rate rises.  Although a number of lenders have since dropped their mortgage rates, homeowners across the nation are experiencing the strain of far higher payments than they were only two years ago.  However, in response to the potential threat of widespread repossessions, the government has stepped in with measures to alleviate the burden on homeowners. This article delves into the impact of rising interest rates on mortgage payments, the government's efforts to reduce repossessions, and will compare that to the implications of bankruptcy on homeowners' properties.

Rising Interest Rates and Mortgage Payments

The Bank of England, in an attempt to combat inflationary pressures and stabilize the economy, has been raising interest rates since late 2021. While this move is essential to control the economy, it also results in higher borrowing costs for homeowners with variable or adjustable-rate mortgages. As interest rates increase, the monthly mortgage payments for these homeowners rise proportionally, putting financial strain on many families. In June 2021, the average two-year fixed rate was 2.55 per cent but that has now shot up to 6.3 per cent, according to data provider Moneyfacts. Those coming to the end of fixed rate deals face big jumps in their monthly payments, due to the higher cost of new mortgages - or the expensive alternative of lenders standard variable rates, which can be 7 per cent or more.

Moreover, potential homebuyers seeking mortgages in a higher interest rate environment might face challenges in affordability, leading to reduced demand in the housing market. This could have a cascading effect on property prices, impacting existing homeowners who might see a slowdown in property value appreciation or might cause them to dip into negative equity.

Government Measures to Reduce Repossessions

Recognizing the potential risks of a surge in mortgage defaults and repossessions, the UK government have taken proactive steps to support struggling homeowners. Various measures have been introduced to cushion the impact of rising interest rates, these include:

1. Mortgage Support Schemes: The government has collaborated with lenders to offer mortgage support schemes, providing financial assistance to homeowners facing difficulties in meeting their mortgage payments. These schemes may include temporary interest rate reductions, payment holidays, or extended mortgage terms to lower the monthly burden. You can see more information on the schemes here. In brief, some of the measures include:

• Properties will not be repossessed for at least 12 months from the first missed payment

• People will be able to switch to an interest-only mortgage for six months or extend their mortgage term to reduce their repayments and switch back to their original term within the first six months. An affordability check will not be required and it will not affect their credit score

• Customers approaching the end of a fixed-rate deal will be able to lock in a new deal up to six months ahead, and be able to apply for a better deal up until the new term starts if one is available

• Those worried about their mortgage repayments can call their lender for support and information. This will not impact their credit score; and

• Homeowners who are up-to-date with payments will be given support to switch to a new deal at the end of their existing fixed-rate deal without another affordability check.

2. Strengthening Consumer Protections: The government has reinforced consumer protection laws to ensure that lenders exercise diligence and empathy while dealing with homeowners in financial distress. This aims to prevent aggressive repossession actions and provides homeowners with more time to seek alternative solutions.

3. Financial Guidance and Counselling: Homeowners struggling to manage their mortgage payments can access free financial guidance and counselling services. These resources help homeowners explore available options, create budgets, and negotiate with lenders to find suitable repayment plans.

The Impact of Bankruptcy on Homeownership

Bankruptcy is a legal process designed to help individuals overwhelmed with debt by providing them with a fresh start. In the UK, personal bankruptcy is governed by the Insolvency Act 1986. But what happens to your house if you are declared bankrupt?

• Loss of Assets: If a person is declared bankrupt, their assets may be sold to pay the costs and expense of the bankruptcy, and creditors. This could include the sale of their home if they have equity in it. However, some assets are protected under the bankruptcy process, such as essential household items and tools of trade up to a certain value.

• Tenancy Agreements: If the individual is renting their home, declaring bankruptcy may not directly affect their tenancy agreement unless there are specific clauses related to bankruptcy. However, the landlord may be notified of the bankruptcy proceedings.

• Mortgage Arrears: If a homeowner is struggling to pay their mortgage and decides to declare bankruptcy, it will provide temporary relief from debt collection actions, including repossession. However, it does not absolve the individual from their mortgage obligations, and the lender may ultimately repossess the property if mortgage payments are not maintained.

Property tends to be the most lucrative asset owned in a bankruptcy, and if there is equity in the property after paying off any mortgage, the trustee in bankruptcy may seek to sell it in order to realise funds into the bankruptcy estate.  Unlike current government measures to assist homeowners with rising mortgage payments, there are no such measures in place to protect the home in a bankruptcy scenario.  After the first year of bankruptcy, a trustee will typically attempt to realise such interest that they have in the property.  They have three years to do so, which usually runs from the bankruptcy order being made.

In joint ownership situations it is important to understand that the trustee’s interest in a property only extends to the bankrupt’s share and not the joint owner’s. The property can be sold voluntarily (with the consent of the joint owner and trustee) and share the sale proceeds as per the terms set down in any declaration of trust or other agreement.  Alternatively the joint owner (or a third party) can buy the share of the bankrupt owner and pay the Trustee. If they do nothing, they may find themselves being forced to sell at a later stage so that the Trustee can realise the bankrupt owner's share.

It is important to speak to the trustee and work with them. Keep them updated with as much information as possible and it may be possible to see if the home can be kept by refinancing to buy out the bankrupt joint owner.

Conclusion

The UK's rising interest rates have put significant pressure on homeowners, leading to higher mortgage payments and potential repossessions. However, the Government's timely intervention with support schemes and consumer protections are likely to be crucial in mitigating the impact. For those facing overwhelming debt, bankruptcy might be an option, but careful consideration of relevant factors is essential to determine whether homeowners can retain their most cherished possession—their home.  Many of the measures introduced to assist homeowners at this time do not apply to bankruptcy, where a trustee will usually seek to sell the home.

If you would like to discuss any of the information provided in this article, please do not hesitate to contact a member of our Restructuring and Insolvency team who would be more than happy to assist.

Disclaimer: Anything posted in this article is for general information only and is not intended to provide legal advice on any general or specific matter.