Last Updated on Friday, 21 May, 2021 at 10:12 am by Andre Camilleri
Pauline Azzopardi has been newly appointed by the Board of Supervisors of the European Insurance and Occupational Pensions Authority (EIOPA) to the Insurance and Reinsurance Stakeholder Group (IRSG) and Occupational Pensions Stakeholder Group (OPSG).
Borrowers may not be aware about remedies that may be employed if they are finding difficulties in meeting their monthly payments on their home loans.
Lenders must do all they can to help borrowers try to bring their home loan accounts in order. A lender must write to a borrower within 15 days of it becoming aware of the account being in arrears. The letter must contain an explanation of the consequences of home loan arrears, for example that the interest rate will automatically increase in case of non-payment; a list of due payments either missed or paid in part; the total of the shortfall; the total outstanding debt, excluding charges that may be made on redemption and an indication of the nature and level (if possible) of charges likely to be incurred unless the shortfall is cleared.
Therefore, it is important that a clear warning in words, that are easily understood, is given to customers in arrears as soon as possible to make it simpler for both the borrower and the lender to solve the situation in the easiest possible way. The lender should also do his best to set up a meeting in order to discuss the specific problems before the arrear options are considered and before enforcing a judicial sale by auction.
1. Payment of arrears over a given period
Here the borrower agrees to clear the arrears by paying more than the monthly installment for an agreed period usually one year.
Full or partial suspension of monthly payments
This solution is used where the home loan is on a capital repayment basis, where there is already a reasonable amount of equity (and therefore security) in the property and where this would be due where the lender believes that the borrower’s personal and financial circumstances merit it. It is essentially a short-term measure and arrears will therefore build up over the period of the “holiday” or suspension, which the borrower will be expected to make good within a set time after the end of the concessionary period.
Accept interest only
If the loan is a capital and interest home loan, the lender may be prepared to accept interest payment only for a specified period. One problem with interest-only payments is that in the early years of a capital and interest home loan most of the monthly repayment is made up of interest. The concession of removing the capital element might, therefore, be worth very little.
Extend the term
The home loan account can be put back on course by extending the term. This could either be on a short- or long-term basis.
Capitalising the arrears
A lender could also agree to capitalise the arrears. For example, a home loan of €60,000, but with €4,000 in arrears could have the arrears effectively built into the loan, making it now a loan of €64,000 but with no arrears.
Surrender the endowment policy (change to a repayment home loan)
This remedy is only possible if the endowment policy is assigned to lender. It is not a good investment practice to surrender a life assurance policy very early, due to no value or loss in value and financial advice should always be sought. A disadvantage of surrendering the policy is that the loan is converted to a capital and interest repayment home loan and so payments will increase and alternative life cover needs to be arranged.
Trade down
The best option may be to trade down to a cheaper property. It is better if the property is sold directly by the borrowers since the price sought would be higher than through a judicial sale by auction where it can be sold at 60% of market value.
The option to sell the property and buy a smaller one will release the equity, which will be used not only to remedy the arrears’ situation but also perhaps provides enough money to meet the deposit for the purchase of the subsequent property.
Constitution of debt
In Malta, the debt collection can be divided into two stages: the Extra-Judicial stage and the Judicial stage. In the Extra-Judicial stage, the lawyer sends out a legal letter calling upon the debtor to pay the debt in question within a number of days and warning that should he or she remain in default within the time-frame stipulated, legal proceedings would be initiated.
If the debtor is unable to pay the debt immediately, a Constitution of Debt agreement may be signed by both parties, whereby the debtor acknowledges the amount owed. This is a private agreement that may also be published by a notary and registered in the Public Registry. Both sides benefit as the debtor gets better terms and the lender has the debtor acknowledge the debt and if he defaults again and not remedy the situation after he receives a judicial letter, the lender gets executive title. Therefore, once the debtor defaults on the new agreement, the creditor can enforce its security immediately against the debtor, without going through long court procedures to get the property and auction it off.
Pauline Azzopardi is Malta’s representative on the new EU Consumer Policy Advisory Group and president of the Association for Consumer Rights Malta and vice president of the Malta Insurance Institute. A Bachelor of Science graduate, Pauline has more than three decades experience in the insurance and banking industry having worked in advisory, technical and executive roles for major international insurance and banking businesses. Pauline is a Chartered Insurance Practitioner and a Fellow of the Chartered Insurance Institute by examination
