In the Times on Sunday there was this interesting article ……

TENS of thousands of Northern Rock borrowers face being trapped in mortgages charging punitive rates of interest following the bank’s nationalisation last week.

About 175,000 borrowers are thought to have been lured into Northern Rock’s controversial 100%-plus loans over the past few years. They are now likely to find it extremely difficult to remortgage after most lenders pulled out of the market last week.

If they stay with Northern Rock, however, they face a huge “payment shock” with repayments likely to go up by as much as £2,000 a year (£166 per month) on a typical loan of about £150,000.

The nationalised bank already has one of the highest rates of repossessions of any lender, and the plight of the 100%-plus borrowers could make matters much worse.

While some were cash-strapped first-time buyers, many others thought the ability to borrow up to 125% of the value of their property was simply too good to miss.

Jamie Lyall, who lives in Newark, Nottinghamshire, and works for a leading high street retailer, borrowed 104% from Northern Rock in July last year. “My wife and I could have put down a deposit, but the Rock deal enabled us to put the money towards an extension,” he said.

“We are now racing to pay off as much of the loan as we can to improve our remortgage options. However, with our second baby on the way this could prove difficult.”

House prices in his area have been flat, so the family are in danger of sliding into negative equity. Unless they pay down their debt, most lenders will baulk at their business.

Ray Boulger of broker John Charcol said: “The government is in effect a negative equity lender, while borrowers who owe more than the value of their homes are left with few options as their chance of remortgaging onto another 100% plus deal is slim.”

Northern Rock pulled its range of 100%-plus loans for new borrowers last week in response to heavy criticism from MPs. Alliance & Leicester, Coventry, BM Solutions, Bradford & Bingley and Cheltenham & Gloucester did the same, leaving limited options for those who have borrowed more than the value of their property.

Mortgages up to 95% are also disappearing fast. Alliance & Leicester, West Bromwich, Britannia and Barnsley building societies have all reduced the maximum they will lend from 95% to 90% of the value of the property.

Brokers said it would not be long before borrowers need a deposit of at least 10% to get a decent rate. Melanie Bien of broker Savills, said: “Aspiring homeowners as well as remortgagers could soon need equity of at least 10% to find affordable deals as the combination of the credit crunch and falling house prices has forced lenders to readdress their attitude to risk”.

Ian Peace, 38, from Huddersfield, West Yorkshire, succumbed to a 115% mortgage with Northern Rock a year ago at a rate of 5.75% fixed for two years. He said: “We were desperate to move and the loan from Northern Rock allowed us to take a lower price on our previous property. I am now extremely worried that I will be stuck with Northern Rock.”

Northern Rock’s 100%-plus range was structured so only 95% of the loan was secured on the property with up to £30,000 as a personal loan – so if the property was worth £100,000, you could borrow £125,000, or 125%.

Peace, who is married and has two children, borrowed 95% of a property worth £144,000 – of £136,800 – plus an additional £28,200. This added up to £165,000, or nearly 115% of the value of the property.

When he comes to remortgage, he may find he is stuck with Northern Rock. However, the best rate available from the bank is 7.58%, giving repayments of £1,225 compared with his current outgoings of £1,038 – an extra £2,280 a year. He could switch just his 95% secured loan to another lender, but Northern Rock would reserve the right to charge him 8 percentage points on top of the standard variable rate(SVR) on the personal loan element. This is now 7.59%, so he would be paying a punitive 15.59%.

The Times on Sunday 24 February 2008

What people don’t know is that they can restructure their unsecured debt by proposing an IVA. The IVA will ring fence unsecured debt and you will only have to pay your mortgage, and an affordable monthly payment to creditors.

Essentially, the deals people took out have changed and in most cases unaffordable. If this is you, don’t struggle on, get debt advice.

Many businesses already provide their employees with a combination of healthcare, pensions, flexible benefits and company vehicle packages, so why not move with the growing needs of many employees and set up a support and advice service to deal with personal issues such as debt worries, which ultimately detract from an employee’s performance in the workplace. It is such support which should be included in the Human Resource manager’s job description.

It is estimated that at least 25% of the adult population have a problem with debt. Taking a workforce in isolation, it is not unreasonable to assume that 25% are insolvent and could be declared bankrupt.

Bankruptcy is a taboo with employers. Currently, many large corporate organisations have rigid clauses in employment contracts which state that if bankruptcy does occur, employment will be terminated. Where is the sense in that? If an employee is trying to get out of debt and struggling, employers should be approachable and show their support, helping employees to get back on their feet. Surely that would be much more responsible and show the company as being a caring and supportive employer, rather one which sacks struggling employees, perhaps just to save face. Clearly, by helping employees the company retains valued personnel and avoids the costs of having to find an experienced replacement.

Human Resource managers should be aware of the options available or be able to point an employee in the right direction to get help. An alternative and more subtle option to bankruptcy is an Individual Voluntary Agreement (IVA) and something which employers should look to educate employees about. Put simply, an IVA is a private deal between a debtor and their creditors to repay a percentage of the debt over an agreed term. At the end of the IVA any outstanding debt is written off. IVA’s do not have the stigma that is attached to bankruptcy and the information is not released into the public domain, meaning that the impact on both the reputation of the debtor and their employer can be controlled.

It can be a humiliating experience to admit that you are in debt beyond your control, so by being supportive, employers can make the process that little bit more bearable. Of course I’m not suggesting that HR departments should become insolvency practitioners (IPs), but should put out messages to the workforce that the company is there to help in respect of all personal issues including debt problems. If HRs knew the basic options available and had contacts with a reputable IP, they could help employees to get the best possible advice so that they can improve their financial situation.

It’s in an employer’s best interest to help workers tackle debt problems, as with it comes a great deal of stress and anxiety, which can have a huge impact on productivity in the workplace. Stress affects around 7million people in the UK, with many stating that money worries are a main cause.

With consumer debt rising so rapidly and showing no signs of a slowdown, personal insolvency should no longer be a taboo subject but should be openly talked about with employees so that they have the confidence to make the necessary moves to get out of debt, before it escalates into something less manageable and much more public.