Millions at risk of mortgage default

The Financial Services Authority (FSA) has warned that any increase in unemployment, rise in interest rates or further falls in house prices could force millions of overstretched middle class families into mortgage arrears.

FSA chairman Lord Adair Turner says:

“This recession is really quite different than the early 1990s.We have households which are more indebted than they were in the past and that creates a vulnerability.”

Some experts believe that interest rates will remain low for a long time. For example, Roger Bootle of Capital Economics has predicted that the Bank Base Rate will not rise above 1% for the next five years.

However, others predict that interest rates will have to start rising at some point this year, as the economy recovers and inflation becomes a threat.

The FSA’s analysis warns that if rates start rising too soon, this would “increase the cost of debt before household incomes have recovered fully.”

Its report says:

“The high level of debt income has left many households vulnerable to property price, income and interest rate shocks.”

It warns that this could cause increased mortgage defaults, arrears and ultimately repossessions. Around 46,000 people lost their homes in 2009 - 15% more than the previous year, but well below the 75,000 forecast.

The better than expected figures were attributed to the low interest rates, combined with an undertaking by mortgage lenders only to resort to repossession as a last resort.

Ed Stansfield, an economist with Capital Economics, says:

(if interest rates were hiked too soon) “I think we could see a very long tail for arrears and repossessions with high numbers of people losing their home stretching back for many years to come.

“People will realise that more of their income is being taken up by higher taxes or greater debt levels.

“Any sudden changes in the economy will seriously widen out the number of people that are going to be affected.”