Your Money: Batten down the hatches

New figures show that more homes are being repossessed. Should you be worried?

To most observers, the mortgage market appears to be in a dynamically competitive phase. Lenders seem to be competing with each other to cut long-term mortgage rates, offering exciting deals to new borrowers and those who are re-mortgaging.

In fact, if you really are after a loan, now may be the time to take advantage of what is on offer. For, below the surface, some mortgage lenders are preparing a credit crunch. They fear the economic slowdown will bring a new rash of defaulting borrowers. According to housing campaigners, moreover, they may be right.

The forthcoming lending crackdown comes in the wake of a report this week by Shelter, the housing charity, which warned that part-time workers and the self-employed are three times more likely than permanent workers to lose their homes through repossession. This group of vulnerable workers already includes one in every four UK homeowners, and is growing fast.

About 60 per cent of homeowners get into mortgage arrears because of losing their job, a temporary drop in earnings, or because their small business has collapsed.

Repossessions are already on the way up again. In the first half of this year, 17,310 properties were repossessed, against just 15,790 in the previous six months - an increase of 10 per cent. Shelter's predicts another increase for the rest of this year.

Other indicators point the same way. Cases of people falling three to six months behind with their mortgage payments rose by 7.5 per cent from 117,840 to 126,700 between December 1997 and July 1998.

There has been an increase not only in successful repossessions, but also in the number of cases brought to court by the lenders. These have risen steadily from 16,566 cases in the second quarter of 1997 to 20,196 in the third quarter of this year. Shelter's report says: "The increase could signal a change in policy amongst lenders, whereby new arrears cases are entering the judicial system earlier. This might be part of a stricter arrears regime, put in place on the warning of an economic slowdown in an attempt to guard against any repeat of the 1990s experience."

Shelter director Chris Holmes says: "Now that properties are coming out of negative equity, some mortgage lenders are seizing the opportunity where there are substantial arrears to go for repossession." Bradford & Bingley is just one of the major lenders involved in the clamp-down. John Harper, the society's lending policy manager, says: "The manufacturing sector is in recession, house price inflation has flattened out and unemployment has ratcheted up a bit. Like a lot of lenders, we were pretty badly hit last time, and we want to avoid that happening again."

Mr Harper expects B&B's measures will be in place by January or February next year, well in time for the Spring 1999 peak buying season. Changes under discussion include increasing the minimum credit score borrowers need to get a loan, sticking to strict income multiples or turning away more first-time buyers.

Sue Anderson at the Council of Mortgage Lenders denies the organisation's members have changed their policy on repossessions. But she accepts that stubborn defaulters will now be taken to court much sooner than they would have been a few years ago.

Cutbacks to state support mean that anyone who took out their mortgage after 1995 now has to wait a full nine months before claiming help. Private mortgage protection insurance can be bought for a monthly premium of between pounds 3.50 and pounds 6 for every pounds 100 of cover you need.

In other words, if you needed to provide for mortgage repayments worth pounds 300 a month, your monthly premiums would be pounds 10 to pounds 20 a month. Private policy payouts usually start after two months, and continue for up to a year.

Shelter's concern is that vulnerable workers are often refused private mortgage protection insurance because they are seen as presenting too high a risk. Even those who do manage to get a policy often find it impossible to make a successful claim. Mr Holmes says: "People have taken out policies and then found out to their chagrin when they get into difficulties that they're not eligible.

"Self-employed people had to show official evidence of bankruptcy, as opposed to having ceased to trade. Other people had to lose all their income from employment, not just overtime or commission, before they could claim."

In many jobs, of course, it is overtime or commission which makes up the vast majority of the total pay received. Lenders have designed what they call a "baseline" protection policy designed for just these borrowers. They hope to announce details later this year as part of a package which they hope will also include renewed state support for homeowners in trouble. The new private polices should be on the market in 1999.

Ms Anderson says: "It's not going to cover relationship breakdowns, but it will extend the cover to a large number of people who are not currently qualified or who would have to meet some fairly onerous conditions in order to claim."