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Mortgage Rescue: Does it Work?
Added 10/11/2009
Despite its good intentions, is the Government's Mortgage Rescue scheme working for Registered Providers (RPs) and - more importantly - vulnerable households and families?
The level of repossessions in England and Wales is, thankfully, falling, but we must consider the role and impact of mortgage rescue in the grand scheme of seeing vulnerable families through difficult times.
Since its advent in January, the Government's original expectation for this £200m scheme was to assist up to 6,000 families over the next two years. But, as many critics have already highlighted, to date the scheme has had an extremely weak start: only one family received Mortgage Rescue help in its first three months.
To make matters worse, statistics compiled by the Council of Mortgage Lenders show that of the 11,400 repossessions in the last three months, 26% have been on a voluntary basis. Commenting on the statistics, the Communities and Local Government (CLG) said some of those homeowners could have been eligible for support. This being an obvious opportunity for Mortgage Rescue to, one must question why it failed to.
One argument is that the scheme faces a major problem in how it is structured. Mortgage Rescue permits eligible homeowners two ‘rescue' options: shared equity or mortgage to rent.
With the shared equity option, available to homeowners with at least a 25% equity share in their home, an RP agrees to pay part of the homeowner's mortgage in exchange for an equity share in the property. This is unpopular, because homeowners are left with manageable mortgage repayments at the expense of losing part of the equity in their homes.
The mortgage to rent has been received as the more acceptable option. In this scenario an RP buys the property and pays the outstanding mortgage. The homeowner becomes a tenant and makes rent payments (lower than market rent) to the RP. Both options may have sufficient flexibility for a homeowner to steady their income and buy back the equity share or property from the RP at a later date.
Criticisms of the scheme have been scathing, but it is also important to note that the process was inevitably slow. Lenders are reluctant to take part and RPs are shying away from the idea of spending large sums on a scheme that may or may not work.
A well informed RP may benefit greatly from the scheme – it offers a 55% grant to RPs towards the purchase of a property, ensuring they can acquire a property at a substantial discount. In addition, the RP may be reassured by the fact that it will have a willing tenant already resident at the property. Should there come a time when the RP chooses to sell the property, it would also receive the benefit of sale at the prevailing market rate.
Whilst Mortgage Rescue has not yielded the glamorous results expected, it is likely that more positive results are just over the horizon.