Loans fuel a rise in repossessions

Borrowing against the value of your home to manage debt is a risky business, reports Stephen Pritchard
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Some repossessions should be little more than a painful memory of the 1980s housing boom, and subsequent bust.

Lower interest rates and tighter rules governing lending have cut the number of people falling behind with their mortgages. But government statistics suggest that repossessions are now increasing again.

The Department of Constitutional Affairs reports that repossession orders in the third quarter of 2005 were 66 per cent higher than in the same period last year. The numbers are still relatively small, but almost 30,000 people faced losing their homes. This is the highest figure since 2001.

Higher interest rates bear part of the blame. "At the margins, some people are finding it harder to pay their mortgages, as interest rates have gone up. Some people have stretched themselves too far," says Ray Boulger, senior technical manager at broker John Charcol.

But rising interest rates are not the only reason more lenders are applying for possession orders. The growth in consumer credit, secured in part on property, is also a factor.

So-called second-charge lenders appear to be behind much of the increase in possession orders, according to mortgage brokers and insolvency experts. A second-charge lender offers a personal loan that is secured on the property, in addition to the mortgage. Often, borrowers take out such loans to consolidate other debts.

As well as lenders offering secured finance, some companies that have provided an unsecured loan will take a second charge over the borrower's property as security. This gives the lender the option of repossessing the property to recover their money.

"What we have seen over the past 12 months is a huge increase in financial institutions with unsecured loans getting second charges, and then going for repossession orders," says Robert Pick, an insolvency specialist at Grant Thornton, the accountancy firm. "It is a change of strategy by lenders."

A year ago, it was relatively unusual for a second charge lender to seek a repossession order, according to Pick. Now, some lenders appear worried that the weak housing market will make it harder for them to recover their money from borrowers in trouble. They may well be acting now, because if house prices fall further, recovering debts could become much harder.

"Second-charge lenders have increased their repossessions," agrees Boulger. "Firms offering consolidation loans to people with adverse credit records are much hotter on going for repossession orders when things go wrong."

But it is not just a question of lenders' attitudes. Rising house prices have given home owners a way of releasing funds to spend on home improvements, but also on cars, holidays and other luxuries. Owner-occupiers who have built up equity in their homes during the housing market boom can release some of that equity as cash by remortgaging, or by taking a second-charge loan.

Some home owners, however, have come to rely on rising house prices to bail them out of debt. Remortgaging to pay off expensive loans, such as credit card borrowing or overdrafts, can make sense if done sensibly. But it is not an exercise that can be repeated time and again. If house prices stall or fall, borrowers can be very vulnerable.

"People have been using the increasing equity in their properties to remortgage on a regular basis," says Pick. "That option is not available any more."

Borrowers in London and the South-east, where house prices have been more or less static for a couple of years, are most at risk if they have borrowed too heavily. But if house prices stop rising in other parts of the country, too, borrowers there will be exposed as well.

For owners in financial difficulties, the best advice is act quickly, suggests Boulger. This might mean negotiating a temporary cut in mortgage payments. Or it could mean selling.

"If you sell with your credit record intact, you can arrange a decent mortgage when you want to buy again," Boulger says.

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