A Guide to Mortgage Rescue Scheme
The government’s mortgage rescue scheme, which is not to be confused with commercial schemes which may describe themselves as mortgage rescue but are really sell to rent schemes, is a state funded, not for profit scheme which aims to help home owners stay in their homes where they would otherwise be repossessed and evicted.
It can be applied for via the local authority of the applicant and there are two basic options, government mortgage to rent and shared equity. In either case, the scheme is not open to everyone and there are certain eligibility requirements which must be met.
Mortgage Rescue Scheme Eligibility Requirements
The scheme is open to households containing at least one person with “priority needs” as defined in the Housing Act 1996 and Priority Needs Order 2001. Such people include:
- A pregnant woman
- A person with whom dependant children reside
- A person who is vulnerable as a result of mental illness, physical disability or some other special reason
As well as falling into one of the above categories, the applicant must:
- Be at risk of repossession (for example the lender is actively taking proceedings for possession)
- If there is more than one owner, all owners must be in agreement
- The mortgage rescue solution must be practical – an application will not be successful if it appears the applicant will not be able to make the new mortgage payments, or payments of rent, after receiving assistance
- It must not be practical for the applicant to downsize to another property in the same area
- The applicant must have sought debt counselling and advice from an approved advisor and must have agreed to debt rescheduling and discussed alternative options with his lender before being eligible for the scheme
- The applicant must not own a second home, either in the UK or abroad
- Each local authority will have set a price cap for its area and the value of the property must be below that cap
- The gross annual income of the household must be less than £60,000 per annum
- For mortgage to rent, the applicant’s outstanding mortgage debt must be between 75% – 120% of the value of the property
- For shared equity, the applicant’s mortgage must be between 60% – 75% of the value of the property
Government Mortgage to Rent
This option is appropriate where even if the applicant were to receive a shared equity loan he would not be able to maintain his mortgage payments, for example if he has suffered a permanent reduction in income, or where there is insufficient equity in the property against which to secure a loan.
A Registered Social Landlord (RSL) will purchase the property and will grant a tenancy in favour of the applicant, which will be an assured shorthold tenancy for an initial term of 3 years. The tenancy should be renewed if, at the end of 3 years, the applicant has complied with the terms kept up payments of rent and the members of the household have not changed. RSLs are not-for-profit organisations therefore unlike seemingly similar commercial schemes they gain no advantage from evicting good tenants at the end of the tenancy.
It is important to understand that you will no longer own the property. Although some housing associations may allow you to but the property back in future they are not obliged to do so.
How Much Rent Will Be Payable to the RSL?
The rent payable under the terms of the agreement should be no more than 80% of the market rent of the property, that is to say the rent that could be achieved were the property to be offered for let on the open market. This is another very important difference between the state scheme and commercial schemes. If the applicant is entitled to housing benefit the amount than can be claimed should be enough to cover the rent.
What Happens to the Proceeds of Sale?
Firstly, the housing association will take 3% of the sale proceeds for its administration and legal fees. Next the proceeds will be used to pay off the mortgage and any other debts secured against the property. If there is any money left over it can be used to pay off or reduce other unsecured debts.
Can I Apply If I Have a Secured Loan as Well as a Mortgage?
Secured loans are just like mortgages, in that they will need to be paid off when the property is sold. A home owner who has a secured loan can apply, but will need to add the debt to the mortgage debt when calculating how much equity there is in the property.
Are There Any Fees Payable to the RSL?
There are no fees people up front however the RSL will take 3% of the sale proceeds to cover its legal and administrative costs.
What If I’m In Negative Equity?
Provided the sum of the mortgage and any secured loans is less than 120% of the value of the property then a home owner can still apply for government mortgage to rent however the mortgage lender and other secured creditors would not be paid in full and would need therefore to agree to accept a reduced amount. They are not obliged to agree but if they do they may write off the balance or pursue it as an unsecured debt. The RSL would still insist on receiving its 3% fee therefore 97% of the sale price would be available to creditors.
It may seem unlikely that the mortgage lender would agree however if they were to repossess and sell (which if they refuse is practically certain to happen) they would not be able to recover the full debt in any case and the 3% fee would be offset by the costs savings resulting from not having to repossess and sell through an agent.
Shared Equity
The shared equity option is appropriate where the applicant has suffered a temporary reduction income or has suffered a permanent reduction but would still be able to meet the mortgage payments if they were reduced. It can also be used to assist an applicant wishing to sell his property on the open market but needing to clear arrears to avoid repossession.
An applicant must have between 25% – 40% equity in the property.
Shared Equity Loans
Under the shared equity scheme an RSL will provide the applicant with a loan, secured against the property, to clear mortgage arrears and/or reduce payments by reducing the total mortgage debt or paying off other secured loans.
How is the Loan Repaid?
No monthly repayments need to be made. Instead, the housing association will own a percentage of the equity in the property which they will be entitled to receive when the property is eventually sold. For example if the property is valued at £150,000 and a £30,000 loan is given this equates to 20% of the value, so that is the percentage of the equity that the housing association will own. If the property is sold 10 years later for, say, £200,000 the housing association will need to be paid 20% of the sale price, i.e. £40,000. If property prices were to fall in those 10 years and a sale price of just £120,000 were to be achieved than the housing association would only receive £24,000.
What If There Is Not Enough Equity to Pay the Housing Association’s Share?
Theoretically this shouldn’t happen because of the minimum 25% equity requirement and the likelihood that property prices will not fall any further however if it does then the housing association will not allow a sale, in that they will not supply a discharge document unless they receive full payment. If the property is repossessed then the lender will be able to sell as the interest of the housing association will be overreached, though it will be able to pursue the home owner for any loss suffered.
Will the Housing Association’s Consent Be Needed to Sell?
Unlike a commercial lender, which is only concerned with recovering its debt in the event of a sale, the housing association has a vested interest in how much the property sells for as this affect the amount of money it will receive for its interest. As a result the association will have to approve the sale price, though provided it is a fair market price it cannot withhold approval.
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