Repossessions soar as rate rises bite

17,000 homes seized in 2006. 20,000 expected next year. But fewer borrowers are in arrears

Home repossessions surged by a massive 65 per cent last year as thousands of households buckled under a mountain of debt and the burden of rising interest rates.

Warning that the situation was set to worsen, the Council of Mortgage Lenders said 17,000 homes were repossessed in 2006, up from 10,310 in 2005. That meant one in every 690 mortgage holders was unable to keep up with repayments and had their home seized.

Michael Coogan, the CML's director general, said he expected repossessions to climb further this year and next - to 19,000 in 2007 and 20,000 in 2008 - as an increasing number of households struggled in the face of higher mortgage costs. The Bank of England unexpectedly raised interest rates by a quarter-point to 5.25 per cent in January, the third such increase since August. Most analysts expect at least one more hike this year. Adding to the pain, consumers are tottering under a record £1.3 trillion of debt.

George Osborne, the shadow Chancellor, said: "Despite the Chancellor's boasts about the economy, people's incomes are failing to keep up with the rising cost of living. No wonder the Chancellor is so keen to move next door to No 10 before the truth about the economy catches up with him."

Adam Sampson, the chief executive of the homelessness charity Shelter, said thousands of families faced the nightmare of becoming homeless. "Spiralling house prices, created by a desperate shortage of housing, are forcing more families to overstretch themselves to get on the property ladder," he said.

While the figures are a personal tragedy for those affected and on an upward trend, they pale into insignificance compared to the early Nineties' recession. Between 1990 and 1993, nearly 250,000 lost their homes as house prices fell and unemployment soared. Analysts said the current level of repossessions posed little threat to the wider economy - for now.

Kelvin Davidson, property economist at Capital Economics, said: "It will take a significant surge in the number of mortgage defaults before we would expect to see any meaningful dampening influence on the wider housing market. While we do expect to see possessions and arrears rise further over the next couple of years, it seems highly unlikely that they will return to their early Nineties' levels."

Mortgage arrears actually dropped last year, according to the CML. The number of mortgages more than six months behind on payments fell by 8.5 per cent to 44,840, while short-term arrears, of three to six months, fell by 6 per cent to 59,100.

"The arrears picture at the moment is fairly complex," said Mr Coogan. "On the one hand, the wave of problems caused by previous interest rate rises has now worked through, so recently arrears levels have fallen. On the other hand, interest rates are rising again, and payment shock may be an issue for some this year as their existing fixed or discounted deals expire."

A separate report showed consumers' morale unexpectedly improved in January although the overall sentiment remains broadly negative. The GfK NOP consumer confidence barometer revealed the latest interest rate hike left people feeling slightly worse off, but keen to snap up bargains in the January sales. Its headline confidence index rose from minus 8 to minus 7, four points lower than this time last year.