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Mortgage to rent: How it works, and why it’s the best solution

Is the new scheme to help distressed homeowners unfair? Does it benefit the big banks? Simon Brooke of Clúid answers the tough questions.

Simon Brooke

THE RECENT LAUNCH of the Mortgage to Rent scheme, which Clúid Housing Association helped to design and pilot, has generated a lot of interest and comment which has raised important issues about housing policy in Ireland today.

Before looking at these, a reminder of the key features of the scheme. Mortgage to Rent helps people with serious mortgage difficulties to stay in their home. It targets people whose mortgages have been assessed as ‘unsustainable’. This means that due to their circumstances it is very unlikely that they will ever be able to make full repayments on their mortgage in the future. Many of these people would otherwise be facing repossession by their lender.

The scheme works like this:

  • The house or apartment is sold to a housing association at current market value. (Housing associations are independent, not-for-profit charities that provide rented social housing for people from housing waiting lists. Only a few of the larger housing associations, of which Clúid is one, will be involved in the operation of Mortgage to Rent.)
  • The ex-borrower continues to live in their home, but as a tenant of the housing association rather than as an owner-occupier.
  • The tenant pays rent to the housing association, which like local authority social housing rents is based on income. If income goes up, the rent goes up; if income goes down, the rent goes down.
  • The borrower will make an agreement with the lender on the outstanding debt that will exist after the dwelling has been sold.

Mortgage to Rent is only right for a small proportion of people in mortgage arrears. For most people the solution will be found in one of a number of other arrangements, including the provisions of the personal insolvency legislation.

For Mortgage to Rent participants, the benefits of staying in their own home without the threat of repossession hanging over them, paying an affordable rent instead of an unaffordable mortgage, greatly outweigh the disadvantage of giving up owner occupation. In any case, for many of them owner occupation has become a financial millstone and a source of great anxiety rather than a means of achieving independence and wealth.

The most commonly occurring questions from the public over the past few days cover four areas:

1. Why would anyone give up ownership of their home, if they will still owe a huge sum to their lender after the dwelling has been sold?

It is correct that in many cases there will be a considerable amount of debt still owing after the property has been sold.

However, because the mortgage has been assessed as unsustainable, the capacity of a Mortgage to Rent participant to make any repayments on a loan to their former lender will be minimal, particularly since they are paying rent on the home, and this will have to be taken account of by the lender. The reality is that some lenders will write off all the debt; and some will seek minimal repayments.

It is important to remember that the outstanding loan will be an unsecured loan because it is no longer a mortgage which is secured against the dwelling. Depending on the participant’s financial circumstances, this loan and other unsecured loans may be written off after five years under the provisions of the personal insolvency legislation that was published last week.

A lender would be very foolish to try to impose repayments that the borrower can’t afford, because it would be extremely difficult to enforce this, particularly when the personal insolvency legislation has been enacted.

All Mortgage to Rent participants will be required to seek financial advice, and they should ensure that this includes advice about the agreement with the lender in relation to the outstanding debt.

2. People availing of the Mortgage to Rent scheme are jumping the housing waiting list.

Yes, that’s true. But the whole point of Mortgage to Rent is that people are helped to stay in their own home, and that couldn’t happen if people had to join the housing waiting list first. And it’s important to remember that in order to be eligible for Mortgage to Rent, participants have to be eligible for social housing.

In most instances, position on housing waiting lists is determined by an assessment of people’s housing need. The greater their housing need, the greater their priority. The truth is, it’s virtually impossible to do this in a completely objective way and most housing waiting lists contain some anomalies. In the case of Mortgage to Rent, people on low incomes are facing the loss of their home which would in most instances give them a high priority in any event.

Overall, the arrangement seems to be a fair one, and the benefits of helping people to stay in their own home significantly outweigh apparent inequities.

3. Why not just write down the borrower’s mortgage to current market value and let the lender take a hit on the outstanding debt?

The trouble with this proposal is that it simply is not an option for people eligible for Mortgage to Rent, who would not be able to afford repayments on a mortgage, even if based on the current market value of their home. That is why a housing association is stepping in to buy the property. The rent paid will be based on household income, and so will always be affordable regardless of the participant’s income.

4. Mortgage to Rent is rewarding financial imprudence by allowing people who made foolish decisions to keep their homes.

Some people certainly did make decisions that with the benefit of hindsight may be seen to be unwise; others were pressurised by their lenders into borrowing more money than was prudent; some people should never have been given a mortgage in the first place; and many people were simply unlucky. But very few people acted so recklessly that they don’t deserve a second chance.

It’s also worth remembering that if house prices hadn’t collapsed there would be no need for Mortgage to Rent because people wouldn’t be in negative equity and so would be able to sell up and rent instead. The reason why house prices collapsed is that there was a house price bubble, and one of the reasons why there was a house price bubble was that previous governments did nothing to try and bring house prices under control. If governments had introduced maximum loan-to-value ratios and loan-to-income ratios (as happens in other jurisdictions) there would have been no bubble and our economic circumstances would be very different.

So it seems a bit hard to blame people for getting caught in a financial trap that was created by government failure to take preventative action.

Simon Brooke is the head of policy at Clúid Housing Association.

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