The ghost of repossessions past haunts UK homeowners

The number of households in trouble is rising, but are we really seeing a repeat of the 1990s nightmare? asks Laura Brady

The word "repossession" immediately brings to mind the hard times suffered by many in the early 1990s.

The word "repossession" immediately brings to mind the hard times suffered by many in the early 1990s.

As the economy shrank in the recession of 1992, with record bankruptcies, high unemployment and interest rates up to 15 per cent, the number of home repossessions rocketed.

The warning issued by lenders - "Your home is at risk if you do not keep up payments on a mortgage" - had never been more grimly pertinent.

By the end of 1993, more than 500,000 households were at least three months in arrears on their mortgages.

Some will personally recall the despair of repossession - the loss of a family home is as much a psychological blow as a financial one - but for others these harsh economic facts will seem just a distant memory.

Fast forward to today and, despite fears of a house price crash amid general warnings of a market slowdown, the spectre of repossession can seem very insubstantial indeed.

This week the Bank of England makes its first interest rate decision of the new year. The industry is widely predicting that rates will be held at 4.75 per cent, giving breathing space to many homeowners.

A possible cut later in the year could even provide a fillip to the market.

Yet, in recent months, an increasing number of homeowners have been appearing in court charged with mortgage arrears - ie, failing to keep up with their monthly repayments.

The most recent figures from the Government's Department for Constitutional Affairs (DCA) reveal that, in the three months to the end of September last year, the number of legal actions relating to home repossession reached 18,513 - 15 per cent more than in the same period in 2003.

Although these actions represent only the number of homeowners summoned to court, not actual repossessions, many will result in court orders ranging from the renegotiation of monthly repayments to the issue of a warrant to repossess properties.

During these same three months, the courts made 11,186 such orders - the greatest number for the period since 2001. Figures for the last quarter of 2004 are released in two weeks, and many will be watching for evidence of further rises.

How much of this recent surge in legal action is down to borrowers' repayment difficulties against a background of rising rates is hard to say.

Interest rates rose four times last year but only from a low starting point: 3.75 per cent to 4.75 per cent today.

And, of course, circumstances differ vastly from 1992 in other respects, too. The UK economy is growing, jobs are plentiful and inflation is low.

"Figures do indicate that more people are getting into difficulty with paying their mortgage on the dot," says Helen Mingay, spokeswoman for the DCA. "But it's not a clear-cut case of repossessions [simply] going up. A judge is more likely to issue a realistic order, such as that the debtor must repay a certain amount each month.

"It can sometimes take four or five court appearances for a judge to order a repossession - they bend over backwards to avoid it."

Towards the end of last year, Shelter's housing advice helpline reported a rise in the number of calls from homeowners unable to meet their mortgage repayments - "certainly enough to reflect these statistics", according to the charity's policy officer, Catherine Grannum.

Rising interest rates are likely to have compounded the most common problems behind repossession: loss of income or an unfortunate change in personal circumstances, Ms Grannum explains. Increases in council tax and utility bills have made matters worse.

Ray Boulger of the mortgage broker Charcol believes the rise in repossessions could be down to the prominence of "second charge" lenders. Companies such as Ocean Finance, among others, loan money to borrowers who don't have a decent credit score at significantly higher rates than those available on the high street.

Typically, they offer existing homeowners top-up loans secured on their property, on condition that there is enough equivalent equity in the house.

"With a healthy credit score, people can remortgage or take a further advance from their existing lender," says Mr Boulger.

"These loans [from second charge lenders] are aimed at people unable to do this, and so rates start at a premium of around 7.5 per cent, as opposed to the 5 per cent you could get on a mortgage."

Many of these companies pile on the interest upfront so that it accounts for the bulk of your initial repayments . If you pay back the money early, you will be left out of pocket, he adds.

Running into difficulty with your mortgage payments will not inevitably lead to repossession. A series of preventive steps can be taken to avoid this nightmare.

When it took over the regulation of mortgages last year, City watchdog the Financial Services Authority (FSA) brought in "conduct of business" rules, setting down clearly how lenders must handle mortgage arrears and repossessions.

If individual borrowers cannot meet their mortgage payments, the lender should at least try to agree on what the FSA calls "reasonable", lower monthly charges. If they are still unable to afford their repayments, they should retain possession of their property and try to negotiate a sale in the normal way.

Repossession by the lender should be a last resort when all other attempts to resolve the situation have failed.

FSA rules also impose strict codes of behaviour on lenders during such a period to avoid causing unnecessary stress to homeowners.

They cannot put pressure on a customer through excessive correspondence, for example, or by making phone calls to them at unreasonable hours.