Get a grip on your debt to avoid repossession

In Scotland, the number kicked out of their homes could fall dramatically over the next few months following a key court ruling which may force lenders to go back to the drawing board.

But risks remain for homebuyers. Interest rates are expected to begin rising later this year, putting renewed pressure on household budgets. Rising unemployment will leave some borrowers unable to meet their monthly commitments.

Furthermore, changes to the state scheme for helping unemployed borrowers maintain their mortgage commitments may set arrears climbing again. The interest rate which the government pays on behalf of borrowers in difficulties was cut last autumn from 6.08 per cent to 3.63 per cent. This may not cover their monthly bills, and will therefore set arrears escalating as unpaid interest rolls up.

Despite these threats, the mortgage debt scene is one of continued improvements on all fronts.

According to the Council of Mortgage Lenders, just 36,300 properties were taken into repossession last year across the UK, less than half the numbers seen during the last recession, and a quarter lower than 2009. Serious arrears also fell by 13 per cent.

David Birne, insolvency partner at HW Fisher & Company chartered accountants, said: "These are very encouraging figures, given the challenges of the past three years.

"A big saviour for many households has been the low interest rate environment. Rates have been at record lows for an inconceivably long time, but at some point this will end.

"When rates do rise, and inflation may force the Monetary Policy Committee's hand sooner rather than later, the number of repossessions and people in arrears could spike sharply."

The CML itself is predicting a bumpy road ahead, with repossessions for 2011 potentially higher at 40,000, with 180,000 mortgages in arrears.

CML director general Michael Coogan said: "As we go through 2011, the numbers facing payment pressures may increase if interest rates rise, and following reductions in the level of public support available. We will be monitoring developments closely, but at present we continue to expect the number of arrears and repossessions to be in line with our forecasts of 40,000 repossessions and 180,000 arrears cases as at the end of 2011."

But the numbers could be distorted by a recent Supreme Court case known as Royal Bank of Scotland v Wilson & others, which ruled that all lenders must issue a calling-up notice before repossession.

RBS tried to repossess the home of brothers Francis and John Wilson without a calling-up notice after they built up debts of 50,000.

But the sheriff said Wilson did not understand the bank's warning letters and thought they were just seeking the money from him, and as such it was not a legal warning.

The Supreme Court upheld this decision, saying a calling-up notice is required. Following standard practice in Scotland, the lender did not use a default or calling-up notice and simply raised repossession proceedings based upon the mortgage arrears.

The ruling means all live cases, estimated at between 2,000 and 3,000, may have to be restarted. This could potentially lead to a fall in repossessions as actions are delayed, followed by a spike once the catch-up is complete.

Below we suggest ways to avoid the mortgage debt trap.

Face up to your debts

If you have a mortgage or other multiple debts such as loans or credit cards, look them in the eye. Draw up a schedule of what you owe and when it must be repaid. Measure this against your income. Work out a timetable to manage your debts.

Reduce your debts

Many borrowers are enjoying low monthly repayments. Use this windfall to reduce your debts, starting first with credit cards and other more expensive loans, but where possible taking a slice off your mortgage.

Consider fixing your interest

At some stage interest rates will rise, so if you have a big mortgage it may be worth fixing your interest.

Get on top of your budget

If, when you assess your debts, your income looks dangerously stretched, you may need to reduce your other outgoings. It may be possible to lower utility bills by switching companies (check out www.uswitch.com). Try, where possible, to cut back on petrol and other transport costs by walking or cycling. Have a rummage through your "stuff" and sell unwanted items on eBay. Stay out of the shops.

Deal with problems

Most people get into serious financial difficulties only when their circumstances change radically, through unemployment, a relationship breakdown or through ill health.

Your lender will take a different approach to your problems depending on whether they are temporary in nature. For example, if you have always worked, many lenders will be sympathetic if you lose your job.

However, if your breadwinner leaves and you have no means of meeting the monthly bills, banks will take a harsher line. Similarly, if health problems are short term in nature, they may show forbearance.Ask for a repayment holiday

Some lenders may agree to a temporary moratorium to see you through a difficult patch, while some mortgages have it written into the contract that you are allowed to stop making any payments for six months; although at the end of this period the repayments are recalculated to include the missed money with interest. When you begin repaying, monthly bills will be higher.

Switch to an interest-only loan

Interest-only mortgages require the borrower to repay, as the name suggests, interest only, without reducing the overall debt. This can be a way of cutting your monthly outgoings.

The mortgage regulator has effectively outlawed these loans for new borrowers. However, they can still be granted if a borrower is facing financial difficulties

Sell your way out of trouble

If you have over-committed yourself, or circumstances change so it is unlikely you will ever get on top of your debts, consider trading down to a more manageable property.

Beware professional debt managers

It is important to seek advice from any of the reputable debt charities, such as Money Advice Scotland, Citizens Advice or the National Debt Line at www.nationaldebtline.co.uk/scotland/. These services are free. But some firms offering debt advice not only charge fees but can masquerade as free services. These are ideally avoided.