Homeowners are warned that a three-pronged attack could see the number of repossessions spiral. Lenders are losing patience with those in arrears; government support programmes are being cut and economic shocks to the system will see interest rates creep up and potential unemployment figures soar.
The latest forecast from the Council of Mortgage Lenders (CML) predicts there will be 53,000 repossessions in 2010, but a new study has warned that home repossessions could mount to 175,000 in 2012. The report by Professor John Muellbauer and Dr Janine Aron of Oxford University stressed that its figures were based on the worst-case scenario of unemployment hitting 11.4 per cent in 2011 and interest rates rising quickly. But many believe that this is a possibility. Repossessions at these sorts of levels would make 2012 worse than even the darkest year of the housing market crash of the early 1990s.
This warning has been echoed by the Consumer Credit Counselling Service (CCCS), the debt charity, which says that the recovery of the housing market may lead to previously merciful lenders beginning to enforce suspended possession orders. "There is no doubt that lenders have shown leniency towards debtors during the recession. However, this leniency may have been partly determined by the markets," says Delroy Corinaldi, CCCS's director of external affairs.
The Government's cuts to support programmes for people failing to meet their mortgage repayments will add to the woes of struggling homeowners. The Housing minister, Grant Shapps, recently announced changes to the schemes that were introduced by the previous government to combat the rising number of repossessions. The mortgage rescue scheme, which allows people to sell part of their properties to a local authority or housing association in a shared equity deal in order to reduce mortgage payments, will face cuts. The proportion of funding for each home bought by a housing association will be reduced from 65 to 55 per cent, and tighter caps will be imposed on property prices and repair costs.
Furthermore, in October, support for mortgage interest payments (a scheme for homeowners out of work) will be halved from 6.08 to 3.09 per cent to match the Bank of England's average mortgage rate, which will further exasperate the issue.
It has been decided that the homeowners' mortgage support scheme, designed to help a household struggling with a temporary loss of income by deferring interest repayments for up to two years, will remain in place until the end of the financial year. However, this has helped only a small number of people since its launch in April 2009 and some lenders refuse to allow it. Similarly, despite original projections that the mortgage rescue scheme would help up to 6,000 homes, the latest figures show that just 629 households have been helped so far.
"I don't think these cuts will make a huge difference. The numbers supported by those schemes has been low, so in terms of the overall impact on the number of repossessions, it will not be significant," says Richard Sexton from E.surv, a surveying company.
For Mr Sexton, the real issue is that despite figures from the CML showing a consistent drop in the number of repossessions in the past six months, the conditions are set to change. He argues that these figures have been kept down by low interest rates, the prospect of significant losses on homes they repossessed, and political pressure to allow people to stay in their properties.
"As the market has recovered, those losses are getting smaller, and whenever interest rates start ticking back up again the number of repossessions can only go in one direction," he says.
With the Government forced to make huge spending cuts, we are likely to see the effect trickle down into job losses and income reductions in the public and private sectors. Economists are predicting that interest rates will rise by the end of 2011, and for many homeowners currently coping with their payments this could prove to be a dangerous combination.
"While the short-term focus on interest rates is for them to stay low, the only thing we can be sure of is that the base rate will rise at some point. It's important that borrowers are not getting too used to base being at the current record low," says David Hollingworth from broker London & Country.
The message to homeowners concerned about being unable to pay their mortgages is to take action early. It's vital to contact lenders as soon as there is a risk of having difficulty meeting repayments. Homeowners are also advised to continue to make payments even if it isn't the full amount owed because this will show willing to lenders. "The golden rule is not to shy away from the problem and to take some action. One of the reasons that repossessions have not hit the expected levels is the forbearance shown by lenders in dealing with borrowers struggling to meet payments," says Mr Hollingworth.
Lenders are under pressure to take possession only as a last resort. There are a number of solutions they can offer, including agreeing to change the terms of the loan, adding the arrears to the amount borrowed and accepting reduced payments in the short term.
For example, they may be prepared to allow borrowers to pay a smaller proportion of their mortgage if they are out of work temporarily. Lenders may also allow borrowers to switch to an interest-only repayment method, for example, which will cut the monthly payment. However, some lenders may be wary of this option: it will mean that the capital balance is not being eroded, so it will end up costing more in interest. However, in the short term this could be a lifeline. Other approaches could be extending the term of the home loan to reduce the payment on a repayment mortgage, but again, this will mean paying more in the long run.
As well as keeping in contact with the lender, it is vital to make the most of free financial help from debt charities such as CCCS, Shelter and Citizens Advice. Even those who are without any difficulties can take preventative steps now and should be taking advantage of the low-interest environment by overpaying on their mortgage or building up a savings pot.
"Overpaying will help to defend against tighter times when rates do start to lift and many will be taking the opportunity to cut their debts now," says Mr Hollingworth.
Richard Sexton, E.surv
It's been pleasing to see that repossession numbers have been falling consistently over the past six months. However, it's possible we are now at the low point in the cycle and that numbers may start to climb later in the year.
Lenders will have exhausted the options open to them to assist homeowners who are continuing to struggle. Increased unemployment will put some households under pressure, as will future rises in mortgage interest rates. When taken together, these could trigger more repossessions from late 2010 onwards.