The dangers of paying the mortgage with plastic
Recent research by Shelter threw up a shocking statistic; one million householders have used their credit cards to pay their mortgage or rent over the past 12 months. This represents 6% of all the homes in the UK, and one in 12 Londoners.
At a time when the government is offering several schemes to help people keep a roof over their heads, the fact that so many people are resorting to using credit cards, often paying around 19% interest, to meet their financial commitments is total madness.
According to Shelter, the problem is affecting all social groups, from those on low incomes to the middle class and other more affluent households.
People who resort to paying the mortgage or rent on plastic are desperate to ward off the threat of repossession – but, in fact, they could be putting their homes further at risk by doing so.
This is because credit card providers can apply to the County Court to have the credit card debt secured on the property if the borrower falls behind with repayments. Therefore, failing to pay your credit card bill could end up with your providers forcing you to sell your home so it can recover its money.
Mortgage lenders have agreed to work with borrowers to ensure that repossession is a last resort for most people, so if you are concerned about paying the mortgage, the lender should be your first port of call.
Be completely honest about your financial situation and see what options are available to help you cope.
All mortgages taken out on or after 31 October 2004 are regulated by the Financial Services Authority, so lenders are obliged to treat you fairly and send you regular statements to keep you informed about your current arrears position. There are also rules covering what the lender must do if it intends to repossess your home - see the FSA website for more information.
There are also three government schemes that could help people who fall behind on their mortgage payments. These are:
1. Mortgage Rescue Scheme
2. Homeowners Mortgage Support
3. Support for Mortgage Interest
You can find out more about these schemes on the DirectGov website, and from organisations such as Shelter and Citizens Advice.
I’m behind with my rent...
If your rent is not paid, the money owed is called 'rent arrears'. Rent arrears are 'priority debts', which means the consequences of not dealing with them are serious - there is a risk of eviction.
Remember - repossession might not clear your debts
Mortgage lender may continue to pursue borrowers for any shortfall following repossession for up to 12 years after the sale of the house.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.