Repossession numbers escalate in sub-prime backlash

According to research by the BBC more than half of the repossession orders in the UK are brought by sub-prime lenders, this despite the fact that the sub-prime sector accounts for just 6 per cent of the UK mortgage market.

Sub-prime lenders would argue that the proportion of defaults amongst their customers would inevitably be higher than the general market but the degree to which the sub-prime sector dominates the survey is still surprising. Interestingly, the research found that over 10 per cent of the cases were brought by just two sub-prime lenders, Southern Pacific Mortgage Limited and Preferred Mortgages, both owned by Lehman Brothers, a US investment bank. GE Money and GMAC-RFC also featured heavily, both were named in over a hundred cases.

It should be stressed that very few of these cases actually end in repossession; many are resolved by borrowers selling their house to meet payments or with some form of settlement. Nonetheless it does appear that sub-prime lenders are taking a slightly more aggressive approach to repossessions. Indeed, a previous study, again conducted by the BBC, at the start of 2007 which contained a CAB report claiming that sub-prime lenders are typically less inclined to negotiate with defaulting borrowers.

The BBC report follows last week’s figures that showed actual repossessions rose to their highest level in eight years in 2007 and adds to the air of pessimism that has immersed the property market in the wake of the credit crunch. With many predicting that 2008 will see a general economic slowdown it is also likely that even more homeowners will struggle to meet their repayments, a worry that seems all the more probable given that according to the FSA as many as 1.4 million homeowners will be looking at higher payments (an average increase of £210 a month, that’s a far from insubstantial £2,520 extra over the course of a year) this year when their fixed rate deals end. The question presents itself: is this the year when our unrealistic borrowing habits bite back.

According to the FSA there are three main factors that could be used to indicate which homeowners are most at risk:

• Longer than usual mortgage terms (e.g. 30+ years) are thought to be riskier.
• High loan to value ratios are a worrying sign.
• A high loan to income ratio is similarly indicative of potential difficulties ahead – lenders have offered as high as six or seven times income to borrowers in the past.

With the possibility of trying times lying ahead in the property market it’s important that you don’t overstretch yourself and to ensure that your mortgage is competitive; consult best buy tables on sites like Motley Fool mortgages and consider what sort of deal would work best for you given the likelihood of impending rate cuts – tracker mortgages have had a surge in popularity for just this reason but don’t necessarily rule out fixed rate mortgages – there are some competitive deals out there at the moment and a fixed deal will always offer a degree of added security.