With three interest rate rises by the Bank of England’s Monetary Policy Committee over the past six months and consumer spending remaining stubborn, it is surprising that first-time buyers still ardently believe owning a property is an aspiration that ought to be accomplished, despite the ever-growing risk of potentially losing it.
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As affordable homes remain thin on the ground and prices look set to rise for the foreseeable future in many parts of the UK, consumers have created a sense of urgency to get a foothold on the property ladder and lenders have responded by providing flexibility, either through increasing income multiples and affordability calculators or by providing loans to non-prime consumers.
However, despite lender flexibility, the result is borrowers are working within increasingly tighter margins when it comes to budgeting their income to pay their mortgage. This has resulted in a media panic whenever Base Rate goes up or Christmas comes around. Worryingly, presumably foreseeable events such as the festive season can cost people their homes.
So how bad is the repossession problem?
Better than expected
Figures released from the Council of Mortgage lenders (CML) revealed that repossessions have risen from 8,140 in the first half of 2006 to 8,860 in the second half of 2006, meaning that for every 690 mortgages taken out, one of those homes will be repossessed. This amounted to a total of 17,000 possessions during 2006 – 65 per cent higher than 2005.
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Although this is an increase, David Stubbs, senior economist at the Royal Institution of Chartered Surveyors (RICS), believes: “The rise was slower than many had feared. These better than expected figures show that strong economic growth during the second half of the year helped take the pressure off household finances.”
However, he added: “RICS expects repossessions to rise further as the impact of the recent increases in interest rates takes its toll and home owners struggle to repay their mortgage loans.”
Michael Coogan, director-general at the CML, confirmed: “Repossessions are likely to creep up from around 17,000 last year to 19,000 this year and 20,000 next year – higher than the low of 6,030 in 2004, but still only around a quarter of the 1991 peak of 75,540.”
Bleak times
Even more worryingly though, is the Department for Constitutional Affairs (DCA) quarterly statistics which reveal the number of mortgage and landlord repossession actions in the county courts do not reflect how many properties have actually been repossessed. The figures paint a far starker picture of the repossession threat.
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The DCA announced in its latest findings that mortgage repossession orders have risen 22 per cent during the year reaching 22,827 in the October-December period, amounting to a total of 91,195 possession orders in 2006 – a rise of 28.7 per cent from the previous year.
Although the DCA said not all orders would lead to repossession and that nearly half of Q4’s orders were suspended, the figures indicate more people are struggling with their mortgage than the CML figures suggest.
Commenting on the early stage of the repossession process, Stubbs said: “Court orders to repossess property were 22 per cent above their level at the same time last year, emphasising that many people who are falling behind on their payments are not finding a way out. Furthermore, the recent increases in interest rates will strain household finances for many quarters to come. Hence, RICS expects repossessions to end higher in 2007 than they ended in 2006.”
Making sense of the stats
Both the DCA and the CML figures are useful for telling us different things about repossession. While the DCA figures give a more up-to-date picture of the number of people in the early repossession processes, the important figure is how many repossessions are actually taking place. However, the DCA figures can be useful for predicting how many repossessions may take place.
Ray Boulger, senior technical manager at John Charcol, explains: “Although the past three Base Rate rises won’t affect figures now, the increased demands on borrowers will really begin to take effect in 2009, when I think figures for repossessions will be in excess of 20,000 unless interest rates come down in Q2 2007. The rise in repossessions this year comes from the rate rises borrowers saw between mid-2003 to August 2004, when interest rates crept from 3.50 per cent to 4.50 per cent.”
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Although DCA figures are well in excess of CML statistics, they demonstrate that many borrowers if hassled by the lender or bailiffs will do something about their situation and will find a way to resolve the problem.
By issuing a court order, mortgage lenders can often prompt borrowers to put their property on the market, allowing them to release some equity and control the situation if the financial problems are long-term. Should they be short-term, borrowers may be able to resolve their arrears with the mortgage lender and agree a plan of action together.
