30 Oct 2020

How voluntary repossession works

When you’re struggling to keep on top of mortgage payments, it can be hard to think of anything else. This is a time of high anxiety and the need for a solution can often cloud judgment.

The good news is that you still have options and you still have rights. You can achieve a lot just by speaking to your lender, as long as you are brave enough to pick up the phone. Voluntary repossession may feel like a good option; a quick and easy way out. But this is very rarely a good idea and often doesn’t mean the end of your mortgage debt. You should sell your property yourself where you are able to rather than commit to the expensive and emotionally draining process of repossession.

The most important thing is to make sure that you get expert advice about your situation. This advice should help you to learn about your rights and your lender’s responsibilities. Just make sure that you only consider voluntary repossession as a very last resort, and only then if you understand the full implications of this decision.

What is a voluntary repossession?

Voluntary repossession is when you choose to leave your home and hand it to your mortgagor in consideration for what you owe. Once you sign over the ownership of your home to your lender, they will sell the property to recover what you owe on the mortgage. The proceeds will then go to paying off your debts.

However, if there is a shortfall on what you owe (meaning that the price your home is sold for does not cover the outstanding balance and any costs associated with selling the property), you will still need to pay off the rest of your debts.

Although voluntary repossession is one alternative when you are in a position where you can no longer afford your monthly mortgage payments, it is possibly the worst solution. Giving up your home may feel like a quick and easy fix, but in reality the process can be long winded and you are quite likely to be left with some of the mortgage debt, even after your property has sold. Your problems do not magically disappear when you choose to have your house repossessed.

How does a voluntary repossession work?

If you chose to pursue voluntary repossession, you should first speak with your lender. They will tell you what the next steps are. The only difference in the process of voluntary or forced repossession is that the lender does not need to apply to the court for a repossession order. The real legwork starts when you have handed the keys back, and that does not change.

Once you have handed over your keys, you cannot live in your home anymore, but it is still your property. Even though you are not living in the house, you are still responsible for paying the mortgage interest, buildings insurance and maintenance costs until the house is sold, and these costs can easily pile up.

It can take a long time for a property to sell, especially if it is empty. Your property may also be more vulnerable to vandalism or damage if it is unoccupied. This means that you are likely to get a lot less for it than you would on the open market.

Properties where the owner has been evicted or the keys have been handed back to the lender lose value very quickly. They can be difficult to sell at all and are frequently sold at auction where prices are lower and most buyers expect to get a bargain.

In addition to this, you will also have to pay your lender’s costs for selling the property. This will include the costs for repairs to your home if necessary, estate agent fees, energy certificates and anything else that may occur. This, in most cases, means that by handing over the keys and letting the lender sell your house, you will probably lose quite a lot of money. Consequently, you would still owe the lender money, even after they have sold your home.

You will also have to find alternative accommodation from the moment you hand back the keys, which in most cases is likely to be a rented house. However, you need to be careful as you may find renting a challenge since this requires a credit check. Your credit report may already be adversely affected by falling behind on your mortgage payments, meaning that you might not pass the credit checks done by letting agents. You should make sure you know where you are going to live before surrendering your house. There are local authority bodies and charities who can help if you need emergency accommodation or are facing homelessness.

The final point to make is that repossession is likely to be even worse if you have more than one charge over your property. It is very rare that a repossessed home is sold at a high enough price to pay off all of the debts, fees and charges.

How bad is voluntary repossession?

The short answer – bad, really bad. Voluntary possession should be avoided at all costs. It is very important to understand that in repossession (voluntary or not) does not mean that the lender will take your house instead of what you owe under the mortgage. Instead, you will often still owe money and end up paying this for years to come.

The impact on your credit rating will also be severe, making it very hard to borrow money for at least 6 years. To illustrate this point, there are whole companies that specialise solely in the repossession process. These companies will manage the repossession process for your lender and all of their fees will be passed on to you. You will have no control over these costs.

Although it is not possible to calculate what those fees will be, it is worth remembering that these companies will employ big teams of people whose wages need to be paid, occupy offices where rent will be paid and eventually still make a profit for their owners. This alone should demonstrate that repossession is an expensive process, and you alone will have to pay for it.

If you are thinking about taking this route you should first try to sell the house yourself. If you are not able to sell the property for the price you think it deserves, there is no reason why it will sell when it has been repossessed. Think about lowering the asking price and do everything you can to sell the house yourself.

Regardless, if you are struggling to keep on top of mortgage repayments, you should seek expert advice as there will more than likely be many other options for you. This is likely to be a very stressful time, but it is not worth losing your health, relationships or family over money worries, so you should speak to someone as soon as you are able to

How much does a voluntary repossession affect your credit?

Your credit report will be severely and negatively affected by a voluntary repossession, exactly like it would be by a forced repossession. This will make it very difficult for you to take out any credit in future, and you may also have to declare it on forms for insurance and suchlike too.

You should consider this carefully as credit checks are carried out for all sorts of products including even the most basic bank accounts, phone contracts and insurance products.

Is voluntary surrender better than repossession?

Not really, no. The only difference between the two is that your lender will not have incurred the legal costs of forcing you out of your home.

It is a myth that you will have any control over repossession, voluntary or forced. Both are expensive, time consuming and emotional processes.

Both options share the same negative outcomes including:

  • You may still owe a considerable sum to your lender
  • This will not necessarily clear second charges
  • You may be homeless
  • You have no control over the process including what costs are incurred (although you will have to pay these) and what price your house sells for
  • Your credit rating will be ruined
  • You will still have to pay mortgage interest until your house is sold
  • You will still be responsible for insuring the property
  • Empty properties can fall victim to vandalism which would reduce the value of the property
  • Empty properties are hard to sell
  • It will be a very stressful process which is likely to impact on your emotional health and relationships

In short, repossession is not a magic solution which will get rid of your mortgage debt. This is to be avoided wherever possible. It is always better to sell your house yourself, even if you have to accept a reduced sale price.

There are many other options than voluntarily surrendering your house. Talk to your lender about alternative options, as if you are struggling and need to sell your house, the mortgagor should, by request, allow you time to sell. This would be more beneficial, as even a fire sale at a lower than average price would be less risky than repossession. You should also look at getting expert advice, as they will be able to set out all of your options and help you through the process.