Lenders should make split mortgages more attractive to those on low incomes
FOR borrowers in heavy arrears who are being threatened with repossession, the offer of a split mortgage must seem like a life-saver. And indeed, a split mortgage will be a generous, adequate and sustainable solution for many people that will allow them to stay in their family home.
However, for some, even a split mortgage will not be a sustainable solution. For others, where it might be barely sustainable it could condemn them to many years living on the breadline and in deep negative equity.
This article discusses the factors which make a split mortgage suitable and identifies those cases where the borrowers may be better off in a Personal Insolvency Arrangement or agreeing to sell their home.
With a split mortgage, the lender warehouses a portion of the mortgage, and usually charges no interest on the part warehoused. This cuts the monthly mortgage repayment and will reduce the actual amount of interest charged.
This will be enough to bring many borrowers above the line of sustainability. If their negative equity is low, house price increases should eliminate their negative equity over time.
But there are downsides. They will be expected to use any additional income in the future towards increasing their monthly repayments. They will be expected to use any lump sums received from redundancy or through inheritances to pay down the warehouse. If they want to sell the house at any stage, and the proceeds are not enough to pay off both the active mortgage and the warehouse, they will still owe the bank the shortfall.
Those on a low income in deep negative equity, who will struggle anyway to meet the reduced repayments, would be better off trying for a Personal Insolvency Arrangement under the new Insolvency Act. At the end of the PIA period, usually six years, they will be out of negative equity; they will be able to write off their unsecured creditors; and they will be able to keep any salary increases or lump sums for themselves. In time, they will have paid off their mortgage in full, and so will own their house mortgage free.
But there is a snag – the lender has a right of veto over a PIA. If the borrower declines a split mortgage, it is likely that the lender will veto the PIA. So while a PIA is much more attractive, it might not be an option.
If the split mortgage is going to be a struggle and the lender vetoes a PIA, the borrower should consider a voluntary sale of the house. If the proceeds of the sale are not enough to pay off the mortgage in full, they will be left with an unsecured debt. They can ask the lender to write this off immediately in return for the borrower's cooperation in the sale of the house. If the lender refuses, the borrower can apply for a Debt Settlement Arrangement, which could write off the shortfall over a short period. If the lender vetoes this as well, the borrower can opt for bankruptcy.
Lenders need to make Split Mortgages more attractive to people in deep negative equity so that they avoid the bankruptcy option which suits no one. For example, they could give the borrower the right to sell the property after five years with a guarantee that any shortfall would be written off.
The accompanying table sets out the factors that a borrower should consider when deciding whether to opt for a split mortgage or to sell their home.
Brendan Burgess is the founder of Askaboutmoney.com, where the topic of split mortgages is discussed in far more detail.
Factors in favour of selling now
Low amount split into warehouse
High negative equity
Can rent cheaper
High standard variable rate
Want to move anyway
Unemployed or low income
Joint owners splitting up
Free to move to UK for bankruptcy
Expect lump-sum in the future
Expect big increase in income in future
Factors in favour of a split mortgage
High amount split into warehouse
Low negative equity
Would cost more to rent
Cheap tracker rate
Not planning to move for a number of years
Couple with children
Existence of guarantor