Broker Guide: Securing finance to clear mortgage arrears

Broker Guide: Securing finance to clear mortgage arrears



798_2022-05-03-11-01-31am.gif
If one of your clients has mortgage arrears and may be facing a repossession or eviction order or are even trying to avoid bankruptcy then securing bridging finance can be a viable option for them.

 

If one of your clients has mortgage arrears and may be facing a repossession or eviction order or are even trying to avoid bankruptcy then securing bridging finance can be a viable option for them.

According to the Council of Mortgage Lenders, the number of repossessions in the first half of the year reached 18,100 – up 9,000 from the first quarter of 2011 but down 7 per cent from 19,500 in the first half of 2010.

Latest figures from charity Credit Action also reveals that 99 properties were repossessed every day during Q2 of this year.

Given these recent statistics, we at Bridging & Commercial thought we should clarify how a bridging loan can help…

 

A bridging loan can help your client to stop repossessions by providing either a small second charge bridging loan to clear the mortgage arrears or by arranging a first charge bridging loan to redeem their current lenders loan in full, including the arrears. Once the arrears are cleared a lender may also then be able to help to refinance, if suitable to a new mortgage.

 

Helen Farmer, Head of Underwriting at Tiuta, explained: “A second charge relates to any credit secured against a property, which takes precedence behind a residential (first charge) mortgage.  You may need to obtain consent from the 1st mortgagees and/or a deed of priority.  Second charge lending is generally perceived as a higher risk than first charge loans.”

The bridging loan could be used to allow the client enough time to sell the property correctly on the open market without being forced to sell the property below market value.

 

A client who finds themself in mortgage arrears and facing repossession from their building society can get a bridging loan for a number of months which can be used to repay the building society for all of the monthly payments to be deducted. This gives your client the chance to ‘repair’ their client rating as they can subsequently provide a payment history. In order to pay back the bridging loan the client can later apply for a re-mortgage.

 

Bridging finance therefore can be effectively utilised to ‘clean up’ outstanding mortgage arrears in order to secure a new re-mortgage to save the property from repossession.

 

Richard Deacon, Sales and Marketing Director at Masthaven Bridging Finance, told us “there are more brokers looking to bridging finance to look to clear arrears and avoid repossession. We think this is mainly due to time restraints placed upon the client to pay back their arrears as they know there are less and less options for refinance out there.

“The most common causes for people applying for this type of finance are repossession threats and bankruptcy petitions. When people find themselves in this sort of position they often find themselves quickly running out of alternative options with which to get them out of the hole they find themselves in.”

A lender’s solicitor only has to give seven days’ notice to pay off any arrears before they are permitted to start legal proceedings.

Before repossession is completed the owner is given a short amount of time before the repossession order is enforced. The order can be adjourned, giving them the opportunity to repay the mortgage loan in full and retain ownership of their home.

 

Alternatively, the bridging loan can be used to allow the client enough time to sell the property correctly on the open market without being forced into a below market value sale.

 

Gavin Diamond, Finance Director at Cheval Bridging Finance, said: “From time to time, we see applications to clear mortgage arrears, to avoid a repossession or bankruptcy or even paying off amounts owing to HMRC. The overriding principle for these types of deals is that the loan has to make sense from the borrower’s perspective. In order for us to lend, the borrower must be able to demonstrate a concrete and plausible exit strategy, which would usually involve the sale of the property. Without this, we wouldn’t be able to lend as it would not be in the best interest of the borrower.”

A typical example case in which a bridging loan can help is when an individual has missed their payments with their mortgage lender and they are facing repossession of their property. Due to the missed payments it will show up on their credit profile and the individual will be unable to refinance with another mortgage lender. They are then unable to stop the repossession even if the loan secured on the property may be relatively small. A bridging loan can be used to clear all arrears and even possibly raise extra finance in order to repay other mounting debts.

 

Helen Farmer told us that “Tiuta receives the occasional application for this purpose” and continued to inform us of what the criteria to be eligible for this type of funding. “Tiuta will generally consider a maximum of 65% LTV on a term of up to nine months. Our minimum property value is £150,000 and we will consider purchases or re-mortgages but any capital raising would have to be agreed on a case by case basis.  As the only realistic take out is sale the property should already be marketed for sale.  This is only offered on a first charge basis only.”

A Non Status Bridging Loan can be used as part of the funds on a first or second charge basis. Your client may be selling their home and wish to raise the necessary capital to give them the cash flow to sell their home. It can also be used to redeem their current mortgage in full stop repossession and can also be used if your client has actually been evicted. There are a handful of lenders that will provide the full redemption balance on current mortgages so that one can regain possession of their home and then allow them to re-mortgage or sell the home at the full market value as opposed to being a repossessed property.

In regaining possession, if your client has been evicted from their home and if there is at least 25 per cent equity they can regain possession of the home.

Your client will need to demonstrate to the bridging loan company that they have a viable way of redeeming the short term finance, such as a new mortgage offer.

A bridging loan can be possible if there is a genuine need for the bridge, a good clear exit route in the shape of sale of the property, and the whole deal is at a safe LTV. If the valuation has no adverse comments then paying off all the adverse credit, CCJs, defaults and arrears that the client has can be carried out. The interest can be serviced from the loan advance for ‘x’ number of months so they can have no monthly payment to worry about, all they have to do is actively market their house ready for sale. The clients can then sell their property further down the line and can repay the loan.

A bridging loan is typically used when an individual is unable to pay a mortgage at a particular time. It is a temporary solution to mortgage arrears and is usually accessed to alleviate cash flow problems until a source of finance can be found. A bridging loan is not just suitable for those hoping to pay back a residential mortgage, but to help them steady their credit rating, relations with lenders and to avoid bankruptcy.

 

Although the sub-prime mortgage market may be a distant memory, there are still clients out there who have an adverse credit history and need to raise funds for various different purposes. This is where bridging finance may just be an option for them.


Do you have any questions?

 

Go to our bridge doctor section to ask a lender for advice and explanations:

https://www.bridgingandcommercial.co.uk/bridge_doctor

 

 

By Jason McGee-Abe

 

Leave a comment