Mortgage squeeze forces homeowners to sell
The number of homes being repossessed rose by 12% in the third quarter of the year, official figures have shown.
According to the Council of Mortgage Lenders (CML), 11,300 homes were repossessed in the three months to September, taking the total number of homes under possession to 30,200. This is the first time that the CML has published data on a quarterly basis, bringing it in line with the Ministry of Justice (MoJ).
Figures also published today (Friday 21 November) by the MoJ show the number of possession orders made by courts in England and Wales rose by 3% to 29,516 in the same period.
However, not all court orders lead to repossession, providing the mortgage lender and borrower can come to an agreement as to how the mortgage will be repaid.
Under new guidelines set out by the government, mortgage lenders must demonstrate to the courts that they have been sympathetic when dealing with homeowners struggling to meet their monthly repayments before they get the green light to repossess a property.
Measures set out in the pre-action protocol, which came into effect on 19 November, include agreeing a manageable payment plan – either by reducing the monthly repayments or extending the length of time over which the mortgage can be repaid.
The CML claims that landlords are increasingly at risk of falling into arrears with this group of homeowners the hardest hit over the period.
Falling rents, an over-supply of rental property and a lack of buy-to-let mortgages has resulted in some landlords being unable to support their mortgage repayments. The total number of buy-to-let loans in arrears at the end of September was 1.58% at the end of September, compared with 1.44% of residential mortgages.
One action being taken by homeowners to avoid repossession is to put their property on the market. A recent survey by the National Association of Estate Agents (NAEA) found that around 5,000 properties a week are being put up for sale because their owners can’t afford to keep up with their mortgage payments.
However, a lack of mortgage credit and falling house prices mean many are likely to struggle to sell their homes.
As a result, Howard Archer, chief UK and European economist at Global Insight, believes that repossessions will continue to rise substantially well into 2009.
“The sharp reduction in interest rates by the Bank of England won’t be sufficient to save an increasing number of people from losing their homes,” he says. “This will be the consequence of faster rising unemployment as the recession takes its toll, higher debt levels, very tight credit conditions and more and more people being trapped in negative equity (owing more than their house is worth).”
Michael Coogan, director general of the CML, agrees: "Conditions in the wider economy suggest a worsening picture for mortgage arrears, however carefully lenders handle their treatment of borrowers in difficulty.”
He adds that while lenders cannot change the underlying causes of financial difficulty, such as unemployment, they can make sure that their response to borrowers is constructive and only seek repossession as a last resort.
Bev Budsworth, managing director of The Debt Advisor, says: “At the first sign of trouble, people should talk to their creditors and open the dialogue as soon as possible. There are things that can be done to relieve the pressure of spiralling costs, including payment holidays and spreading the mortgage arrears over a period of time.
"People shouldn’t bury their head in the sand as the problem will not simply go away if it’s ignored. Homeowners shouldn’t hand the keys back to the lenders without talking and negotiating with them first – repossession should only be a last resort!”
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.