Fears of mortgage debt crisis as UK repossessions hit eight-year high
The prospect of a mortgage debt crisis loomed yesterday after the number of home repossessions in the UK soared by 30% to an eight-year high as households struggled to keep up with mortgage payments in the face of higher interest rates.
With the Bank of England expected to increase borrowing costs again before the end of the year, analysts warned that repossessions could surge even further.
The first half of this year saw 14,000 properties repossessed, a 30% rise on a year ago, the Council of Mortgage Lenders said. This is the highest level since 1999 and equivalent to about 77 homes a day.
The unexpected jump was blamed on an increase in lending to borrowers with a poor credit history in the so-called "sub-prime" mortgage sector.
Interest rates, which have risen five times in under a year to 5.75%, were also a big driving force in rising debt and missed mortgage payments.
Economists cautioned that the impact of the recent rate increases was yet to be felt and homeowners would not be able to rely on rapid rises in the value of their homes as the housing market cools.
"With the housing market slowing into 2008 and interest rates expected to hit 6%, homeowners slipping behind with their repayments may be left stranded, unable to sell their way out of trouble," said David Stubbs at the Royal Institution of Chartered Surveyors.
Nearly 2 million homeowners will be coming out of fixed-rate mortgage deals in the next 18 months and find themselves having to renegotiate terms with interest rates 1.25 percentage points higher.
The CML said that 125,100 homeowners had mortgage arrears of three months or more, 4% higher than the six months to the end of December, but 3% lower than for the first half of 2006.
The housing charity Shelter criticised irresponsible lending to people who could not afford the repayments.
The Liberal Democrat Treasury spokesman Vince Cable said borrowers needed to be fully aware of the risks.
"These figures demonstrate the complete absence of an adequate safety net in the mortgage market. There is currently a considerable degree of irresponsible lending and aggressive marketing to individuals," he said. "The government should be actively working with the financial services industry to achieve a national roll-out of independent advice centres, providing people with early access to financial health checks before they get into a crisis."
The repossession figures came as the government reported a surprisingly sharp drop in the number of people declaring themselves insolvent in the second quarter of the year. It said 26,956 people in England and Wales were declared bankrupt or took out an Individual Voluntary Arrangement (IVA) during the three months to the end of June - 8% less than during the previous three months when the figure hit a record high. Of that total, 16,258 were bankrupt, 3% less than the previous quarter, while the number of IVAs tumbled by a hefty 15%.
Banks have become more reluctant to agree to IVAs, under which debtors pay back only a portion of their borrowings.
But experts warned that the fall in insolvencies did not signal the end of a tidal wave of debt that has built up since the turn of the millennium. Insolvencies are still fairly high at about 300 a day.
Mike Gerrard, head of personal insolvency at Grant Thornton, said: "The existing mountain of debt still stands, consumer spending remains unabated and there is a strong likelihood of more interest rate rises, which will cause more individuals to resort to bankruptcies and IVAs."
Pat Boyden at PricewaterhouseCoopers said while it appeared people were switching from unsecured loans to mortgage debt, households may return to credit card debt in the future to make up for shortfalls in their income against a backdrop of higher inflation in recent months and modest growth in wages.
"Gordon Brown's 10 years as chancellor have left Britain with record personal debt, rising taxes and falling take-home pay," said the Conservative shadow treasury secretary, Philip Hammond. "No wonder he couldn't wait to get out of No 11."
Source: guardian.co.uk
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