Statistics show that there has been an increase in the number of home repossessions in the UK during quarter three of this year due to the increased mortgage interest rates, as well as the global credit squeeze. The number of repossessions increased 1 per cent between July and September of this year, compared to the same time period last year, to 34,717 repossessions. Conversely, the number of repossession orders has decreased by about 1 per cent compared to quarter three of last year because repossession claims did not result in repossession orders.
The credit squeeze is affecting banks and lenders that rely on wholesale funding, and due to this, these banks and lenders have had to become increasingly selective when choosing who to lend to. In addition, they've had to increase interest rates which is lending to the increased stress and strain being felt by borrowers because their payments are now higher.
Analysts in the UK predict that soon mortgage debt will overcome credit card debt and personal loan debt to become the leading cause of financial strain on consumers.
Records show that many of the incidences of repossession have to do with borrowers who have less than desirable credit. As of right now, 8 per cent of the mortgage lending market is gear toward this type of borrower. Some lenders choose to cater to applicants with subprime credit histories despite the fact that they carry a higher risk that they will default on their mortgage payments.
The Council of Mortgage Lenders projects that the number of repossessed properties will soar next year due to the number of mortgages that have been given, and are still being given, to those with subprime credit histories. The Council of Mortgage Lenders estimates that by the end of 2007, there will have been 30,000 homes repossessed, and at the end of 2008, they predict that the number of repossessed properties will reach 45,000.
Unfortunately, it doesn't appear that things will be looking up for consumers any time soon. Around two million lenders will be nearing the end of the fixed interest rate period on their loan within the next 18 months, so their payments will increase to meet the current higher interest rate. These higher monthly payments will make it more and more difficult for borrowers to stay financially afloat.
Despite the financial hardships that people are dealing with, the number of insolvencies has decreased 5% since last year. R3, the Association of Business Recovery Professionals, says that this statistic may be a bit misleading as far as how many people in the UK are actually experiencing financial difficulties. R3 posits that this number appears low because banks and creditors are pushing individuals with debt problems to seek help in the form of informal debt management programs which are not legally binding, and they may last indefinitely.
To further the problem of finding debt help, the number of IVAs being granted is on the decline. The number of IVAs being granted may be falling, but the number of people in debt is not. Consumers are being forced into bankruptcy or into debt management plans. It has been predicted that there will be an increase in the number of bankruptcies next year because people will have to declare bankruptcy as a last resort.
The increasing amount of credit card debt in the UK is a signifier that the insolvency rate will be increasing soon. People are using unsecured borrowing as a way out of debt right now, but what they are actually doing is burdening themselves even more. Due to problems with the subprime lending market, it will be becoming increasingly difficult to use unsecured borrowing as a way out of debt in the future.