UK Debt Burden Starting to Hurt Homeowners

Friday January 12, 2007

In a bitter blow to homeowners with adjustable-rate mortgages and those struggling to pay loans and credit card bills, on January 11 the Bank of England again raised its lending rate, by one quarter of a point. This is not good news for the many cash-strapped consumers with adjustable-rate debt.

Although a quarter of a point may sound mild, it was the third rise in interest rates in the last six months, and borrowers are now paying more for their loans than at any time since May 2001.

Commenting on the rising interest rates, the Royal Institution of Chartered Surveyors (rics) warned that home repossessions could become widespread as soaring bills and rising mortgage repayments squeezed homeowners.

“We are already seeing a rapidly growing number of people falling behind with mortgage payments and in some cases threatened with repossession, and we know some people are taking on mortgages that stretch them to the absolute limit. Any increase in mortgage interest rates could spell disaster for people whose finances are balanced on the very edge of affordability,” said Peter Tutton, policy officer at Citizens Advice.

Approximately 8,140 families lost their homes during the first six months of 2006—up 76 percent over 2005. For 2006, rics predicts repossessions to escalate to 19,000, or 52 per day.

“It is a ‘drip by drip’ problem. An extra £5 on their mortgage, £10 on their council tax bill and so on is really putting the squeeze on people who are financially overstretched already,” said Mark Sands, a personal insolvency expert at accountants kpmg.

Rising interest rates directly affect approximately half of all outstanding home loans in Britain. For example, a homeowner with a £250,000 variable rate interest-only mortgage will pay £156 a month more than just back in July last year.

Eleven years of low and falling interest rates, coinciding with rising home prices, have seen the average mortgage size rise by an astounding 278 percent. Consequently, couples now need “nearly 82 percent of joint take-home income to fund the upfront buying costs of a typical home,” according to David Stubbs, senior economist at rics. This leaves an increasingly small proportion of homeowner wages for other expenses, let alone savings or emergencies.

And because record-high house prices have forced many families to take on unsustainable mortgages in order to buy a home, rising interest rates could be especially painful for homeowners needing to cut back.

“For too many ordinary families, the dream of home-ownership is becoming more and more unaffordable,” says George Osborne, the Tory shadow chancellor. “The cost of living is rocketing ….”

But Britons are not alone. In America, many homeowners are facing the same financial squeeze as interest rates have risen following years of home-price escalations.

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News Source:
http://www.thetrumpet.com/index.php?page=article;id=2885