Will new EU law threaten your home?
Filed under: Mortgages
And there are knock-on effects for all homeowners.
Mortgage Advice & Info
The directiveThe new directive, reported by the Financial Times, would require banks to start repossession proceedings as soon as a homeowner is three months in arrears with their mortgage payments. At the moment in the UK banks must wait until a homeowner is six months behind with payments before the process can be started.
The aim of the law is to make lending safer at banks across Europe, and ensure they take fewer risks. This clause is designed to ensure banks don't end up carrying massive books of failing loans for months at a time. It's hard to argue with the motive. It's just that if the directive goes through, the effects will be dramatic.
Massive impactAt the moment just under 0.1% of all mortgaged homes are repossessed each year. However, there are many thousands more who are three months behind with payments but not yet classed as in arrears. This law would automatically drag those people into the danger zone. It could mean that overnight the number of potential repossessions would go through the roof.
And this won't just affect those who are struggling to pay their mortgage: anyone with a mortgage will suffer. The change will increase costs by an estimated 15%-20%, because the risk of default would be so much higher.
These costs would naturally be passed onto borrowers, either in the form of higher fees or higher interest rates. It would mean that those who pay their mortgage on time and in full every month would have to pay the price for those who fell short. We would all see mortgage payments increase dramatically.
Price crashFor many households the affordability of the mortgage is the only thing keeping their household finances in one piece. A hike in interest payments could push many more over the edge. It would mean more people going into arrears with their mortgage, and even more losing their homes. Not only would this be a tragedy for the individuals themselves, but it would flood the market with properties and push prices down.
Meanwhile, banks would conclude that more and more homeowners are too high a risk to take on, so would make fewer mortgages available. This would mean that the number of buyers dried up.
The cruel combination of more sellers and fewer buyers would push prices to serious lows, and we could easily see falls of 10% or more - even from the current rock bottom prices.
The change could come in as soon as 2013, at which point we can only hope the economic picture improves or we could have a serious house price crash on our hands.
The EU considers this a price worth paying for the stability of the banking system. But what do you think? Is it really worth it?