Serious trouble ahead for borrowers

The number of struggling borrowers may be falling, but we are not out of the mortgage woods just yet!

What fills mortgage borrowers with about as much dread as negative equity and is poised to rise next year and beyond?

Falling behind on your mortgage and ultimately being repossessed.

Mortgage arrears are every borrower’s worst nightmare and most people will pull out all the stops to ensure that they meet their monthly repayments.

So the publication of figures last week that show arrears and repossessions fell in the second quarter of 2010 should offer some comfort that the mortgage market has well and truly come through the worst of the recession.

Unfortunately it doesn’t necessarily work like that.

Because despite the fact that falling arrears figures last week were very welcome news, many experts have warned that we are currently experiencing the calm before the storm, with thousands of households only just managing to meet their monthly repayments.

In fact, the looming threat of job cuts combined with possible interest rate rises means that the scope for a sharp rise in arrears and repossessions is enormous.

But first the good news!

Fewer struggling homeowners

According to the Council of Mortgage Lenders (CML) there were 9,400 repossessions in the second quarter of this year, down from 9,800 in the first quarter and 11,800 a year ago.

The number of people who have fallen behind on their mortgages also fell. At the end of June there were 178,200 loans with arrears equivalent to 2.5% or more of the mortgage balance. This was 5% lower than at the end of March, and a massive 17% lower than a year earlier.

Good news indeed.

In fact the arrears and repossessions figures are so positive that the trade body has revised its forecasts for 2010 as a whole (and it doesn’t do this lightly).

The CML now expects 175,000 mortgages to end the year in arrears, compared with the previous forecast of 205,000. And it has revised its repossessions forecast for the year down from 53,000 to 39,000 -- a huge drop.

The Ministry of Justice (MoJ) also released figures on repossessions last week that back up the CML stats. It said that 17,774 mortgage possession claims were issued in the second quarter of 2010, a massive 30% fewer than in the second quarter of 2009 and 5% less than in the first quarter of 2010.

The MoJ has now recorded an improving repossessions picture since the first quarter of 2008, which should be enough to convince us that the worst is now behind us, shouldn’t it?

Storm clouds gathering

Despite the good news, many experts believe that there is a huge risk that arrears and repossessions could increase again in the coming months and through 2011.

The CML admits there is no room for complacency, saying that the ongoing prognosis for arrears and repossessions is far from healthy.

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It points to the prospect of higher interest rates, a possible rise in unemployment, uncertainty over future debt advice funding, reduced Government support for mortgage payments, and mortgage rescue schemes being reviewed, as forces that could lead to a jump in the number of borrowers experiencing payment problems.

National debt charity the Consumer Credit Counselling Service (CCCS) also welcomed the recent fall in repossessions but agreed that a rise is likely over the next year.

It noted that lenders are showing particular leniency in the current market but if this were to change, enforced repossession orders could rocket. Lenders are being urged to continue their approach of showing forbearance to struggling borrowers.

And it added that the situation is likely to be aggravated in October when Support for Mortgage Interest payments for those who have lost their jobs are halved from 6.08% to 3.09%, to match the Bank of England's average mortgage rate.

It’s also worth remembering that the official figures don’t tell the whole story, and there are many borrowers who may not have been repossessed, but who have still found their mortgage responsibility too great to cope with.

Some interesting research last week from the Centre of Housing Policy (University of York) for example, shows that on top of the 19,000 homes that have already been repossessed in 2010, many more people have been forced into selling up before any court action is taken against them because of financial difficulties.

Added to this are the thousands who are only just coping and would fall into arrears if interest rates were to rise.

All in all, a combination of future rate increases, increased unemployment as a result of the public sector jobs cull later this year, and potential changes to Government support schemes could produce a toxic cocktail of rocketing arrears and repossessions.

What should you do?

If you think you could fall behind on your mortgage it’s essential that you tackle the problem early.

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Anyone struggling with mortgage payments should get free, independent advice as early as possible. Go to www.adviceguide.org.uk for more information and contact details of your nearest Citizens Advice Bureau.

If you are managing your monthly repayments now but you are concerned about the impact of rising interest rates, you might want to considering remortgaging to a fixed rate mortgage. This will allow you to lock into a rate for a set period and you can protect yourself from interest rate rises.

In the current market you will pay a premium for a fixed rate deal over a variable rate mortgage, but depending on your circumstances you may decide it’s worth it for the peace of mind.

If so, here are some of the best deals on the market right now.

Safety first – 18 top fixed rates

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