By Ann Ebberson, partner in Rosling King’s Real Estate Group
The U.K is going through a cost-of-living crisis driven by a multitude of different factors including the slump in the value of the pound, high inflation outstripping wage increases and thus leading to less disposable income, as well as tax increases.
Given the squeeze on household incomes, there is a real possibility that borrowers will default on their mortgage in numbers not seen since the 2008 global financial crash. Consequently, lenders must consider whether it is now time to review their security and start preparing for, and training staff to deal with, volume defaults.
A borrower can default on their lending in many different ways and defaults are, of course, specific to each lender under the terms of their loan conditions. However, there are types of default which are most common to lenders including:
- Defaulting on monthly mortgage payments or mortgage interest. This will no doubt be the most common and all lenders will be used to dealing with this issue.
- Interest only borrowers not able to repay the capital at the end of the term as their investment has fallen over or they were planning to refinance and are no longer able to meet affordability criteria or they are unable to sell due to market conditions.
- Allowing the property to fall into disrepair. With incomes squeezed to their limits, making those necessary repairs to the security properties may not be possible but this could devalue the security property or, with a buy to let, affects its ability to be rented out or the level of rent a borrower is able to charge. With a leasehold property, this could also cause breaches of the lease leading to claims by the landlord and putting the security at risk.
- Bankruptcy. Will more Borrowers consider this a way out of mounting debt?
- Buildings insurance. No doubt the loan conditions will require the Borrower to insure the property against the usual risks but this may be seen as an unnecessary cost by the Borrower in the current climate. For a lender, however, this could be a very real risk to their security property.
- Non-payment of service charge or ground rent. In respect of leasehold properties, non-payment of service charge or ground rent will often constitute a default. Lenders should be aware of the power of forfeiture that a landlord holds i.e. termination of a lease. If the lease is forfeited, your security will fall away.
There are a number of options open to lenders to enforce their security in the event of a default or breach of the lender’s security. The options available to lenders are governed by their security and lending conditions, so it is vital that lenders are aware of their existing security and how it entitles them to act.
Some options to consider are:
- The lender can appoint a Law of Property Act Receiver/Fixed Charge Receiver;
- Exercising your power of sale under the provisions of the Law of Property Act 1925 and selling the security property;
- Seeking repossession of and selling the security property; and
- Enforcing a Guarantee.
Lenders should however be looking for early signs that their borrowers may be facing problems and interacting with them early to try and prevent these problems leading to default on the loans and the above options becoming necessary.
Lenders need to be prepared. They should take time now to review their security and corresponding documentation and consider all the options available to them. Early engagement with their Borrowers is imperative.