More families set to lose their homes as squeeze bites deeper

Repossessions forecast to rise by 22 per cent to 45,000 this year as inflation and unemployment take toll

Britain is braced for a sharp rise in home repossessions as the consumer squeeze forces thousands of struggling families to the wall.

Low interest rates and lower-than-expected unemployment kept repossessions at relatively small numbers through the recession and they eased again as the country struggled into a tepid recovery. However, with incomes failing to rise to match inflation and unemployment set to increase sharply as government cutbacks bite and an embattled private sector fails to replaces jobs lost from the public sector, economists fear that will change.

The Council of Mortgage Lenders is already forecasting a 22 per cent rise in repossession for 2012 to 45,000. But if the economy fails to meet up to expectations or if unemployment rises more sharply than expected those figures could easily be blown off course and look much worse at the end of the ear.

People dealing with those in financial difficulties also say that while mainstream lenders have made efforts to help manage the problem by exercising forbearance with borrowers in arrears and even restructuring loans, they have been frustrated that sub-prime lenders – which deal with less financially stable individuals – have been less willing to help.

Peter Sutton, credit and debt policy officer at Citizens Advice, said: "There is a big lump of cases of arrears that are moving into possession and there is also the problem of unemployment going up. We are also seeing the impact of rule changes over support for mortgage interest for people who have lost jobs. There is a two-year limit on that and, with unemployment not recovering, people are hitting that buffer."

Mr Sutton said the squeeze on incomes was also having an effect: "The picture is very unclear at the moment. We really do need lenders to stay the course and help to manage people out of problems when they occur."

The CML figures show that 27,500 homes were taken into possession in the first three quarters of the year. The 2011 total is expected to come in at 37,000 a slight increase on 2010 when 36,600 homes were taken over by lenders.

But Sue Anderson, head of member and external relations at the CML, said: "Repossessions have been contained at fairly low levels through the downturn, helped both by low interest rates and low unemployment.

"Although lenders will continue their strategy of forbearance, rising unemployment and living costs will place upward pressure on the number of repossessions this year." Philip Shaw, economist at Investec, also warned of a likely rise in repossessions. He said the key factor to avoid a 1990s style crisis would be management of the problem. Mr Shaw said: "It seems likely that repossessions will rise. It would be surprising in a recession if it didn't. The main thing is how the situation is managed. Banks have been encouraged to exercise a degree of forbearance and the evidence is that this is mitigating the problem."

One thing that will keep the situation at manageable levels is the fact interest rates are expected to sit at of 0.5 per cent until 2016 and perhaps longer.