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Christmas credit crunch: One million Britons struggle to meet mortgage payments
Last updated at 00:52am on 19.12.07Nearly a million families are struggling to pay off their mortgages, an alarming report has revealed.
Another 1.8million people say they have hit problems "at least occasionally".
Soaring interest rates have lifted homeowners' annual mortgage payments by a total of £3.6billion in the past year, the Bank of England survey shows.
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Hard times: House buyers risk mortgage nightmares
The picture is expected to worsen as the global credit crunch prompts banks to tighten the supply of money even further to shore up their own finances.
This could push more households to the brink, leading to record insolvency rates over the next two years, experts warn.
The housing market and the broader economy are expected to suffer a sharp downturn.
The poll - in the Bank's Quarterly Bulletin - shows that many households are being forced to slash spending or borrow even more.
Almost half the families facing higher interest payments said they have cut back spending on everyday items.
Nearly 10 per cent have been forced to borrow more or extend their mortgages.
And another 10 per cent had to take on a second job or work overtime to make ends meet.
Worryingly, the Bank's poll was conducted in September, when the global financial crisis was just beginning.
Conditions have deteriorated dramatically since then.
To add to the problem, it emerged yesterday that many lenders are dragging their feet over passing on the quarter-point interest rate cut announced by the Bank last week.
The figures in the Bank's survey show how vulnerable family finances have become following a decade-long borrowing binge that has pushed personal debt beyond £1.3trillion.
Fixed-rate borrowers have seen an average £708 increase in their yearly bills as more generous deals expired - and more than a million face the same prospect next year.
Those on variable rate mortgages reported a £540 jump.
As a result, close to one in ten of the 11.8million mortgage holders admit they are struggling to pay off their loans, the highest figure since 1995.
Another 15 per cent - equivalent to 1.8 million people - said they have "at least occasionally" struggled with their debts.
Economist Michael Saunders, of Citigroup, said last night: "The severity of the housing slide and credit crunch raises the likelihood of a sizeable consumer slowdown.
"Stretched housing valuations and the financial market crisis may cause a vicious circle as reduced credit availability worsens the plunge in housing demand.
"The resultant drop in house prices and economic growth may then cause a further tightening in loan standards."
The Bank of England study revealed that families are taking on far bigger debts than they used to in order to purchase homes, following a tripling of house prices since the beginning of the 1990s.
Around 15 per cent of people with mortgages owe more than 150,000, compared with fewer than five per cent in 1991 - the average property value is now close to £200,000
And approximately a third of households have to devote more than 20 per cent of their incomes to mortgage repayments, the highest proportion since the Bank started asking the question in 1991.
The Bank said: "Higher house prices have meant that new entrants to the housing market have had to borrow larger amounts to finance house purchase than did their predecessors."
It added: "The increase in mortgage repayments represents a loss in disposable income that requires some adjustment to household budgets."
The Bank managed to strike an optimistic note, however, saying the massive house-price gains of recent years should cushion many families in any downturn.
And it said the proportion of people having trouble servicing their debts was still lower than in the early 1990s recession, when house prices plunged and interest rates soared to 15 per cent.
The survey also showed that people who rent are having much more trouble repaying their debts than those who have mortgages, because they are often on lower incomes.
Some 28 per cent of renters said they had trouble paying their debts "at least occasionally".
The Confederation of British Industry will today add its voice to warnings about the property market, predicting that values will decline by around one per cent in 2008.
Chief economic adviser Ian McCafferty said last night: "It's fair to say that the direction of the economy is clear into 2008 - the economy will slow quite markedly."
But he added: "While the slowdown may appear dramatic set against this year's strong growth, the fundamentals of our economy remain sound and talk of a fullblown recession is overstated."
Reader views (16)
Dan - why do I, when I read your comment, get an image of an American cop standing outside a firework factory that is out of control on fire, with the fireworks going off all over the place, with the cop saying -'move along, nothing to see here, move along now'? Or indeed an image of you standing on the deck of a house shaped cruise ship (HMS Titanic House Price) that has bumped into an iceberg (with Norther Rock, Credit Crunch, etc. written all over it) and is clearly sinking - with Phil and Kirsty on the deck shouting desperately - "it will never sink ... you do believe us don't you?".
Dan, just like Jon you have shown yourself to be lacking in knowledge about economics and markets. Why are house prices going down (despite interest rate cuts) in the US? And also in Ireland, France, Spain and the UK for the last 4 months? Asking prices dropped by 6.8% in London in one month! Up till a few months ago there were over 1500 subprime BTL mortgage products in the UK. There are now 18 such products. Nationally, for BTL properties rental yields are just over 3% which means for large numbers the yield is negative (rental incomes do not cover the mortgage and the value of the properties are falling! What a great investment! You would earn more profit by putting your money in an ordinary savings account (6%). You seem to have sour grapes that the game, of profit from houses, is over for the next 8 to 10 years. It's not nice seeing your greed at the cost of others!
- Doug, Birmingham
Doug - wishful thinking. The world economy is not in big trouble and the credit crunch will pass. It's not nice to see someone wish others bad times and it sounds like sour grapes on your part. People need to curb their desire for loans and credit cards to start with, and stop wanting everything now.
- Dan, Manchester
Buy to Let investors annoy people because they generally tend to buy 1 or 2 bedroom flats, the typical "first time buyers" type of home which of course then means that the first time buyer can't afford anything and so it goes on. So no, I don't admire anyone who has done that, I'm just grateful that I don't have to worry about getting on the property ladder, but I have serious sympathy for anyone who still wants to. If my house price goes down, it goes down, there's very little I can do about it, so I will just sit it out and wait. The only good thing in my opinion is that if my house goes down, so does any house I want to buy.
- Louise, Essex
Jon, Radlett, you don’t have a clue about economics do you?
- Danielle Wilson, London
Well, the house price inflation happened because of supply and demand, and demand was due to very low interest rates. New Labour politicians praised themselves for keeping the interest low. People started to borrow more and more and house prices were going up and up. Now the credit crunch has come and Northern Rock has to taste its bitter fruit and go to wall. Please do not interfere in the financial system and let them taste their bitter fruit and do not offer them more money.
- S.Johnson, Reading, UK
Jon and Steve - I don't suppose you are Estate Agents and/or BTL'ers by any chance? Why would I be worried if my house fell by 50% in value? As I said before, I will still have exactly the same bricks and mortar as before - i.e. the house I love. And in addition, when house prices have fallen substantially, as they surely will, it will be much cheaper for me to sell up and move to a better, bigger house in a better area to live in. Falling house prices is of benefit to huge numbers of current home owners/mortgage holders and in addition will allow the currently priced out generation to get on the property ladder at a sensible price. Not only that, they will be able to buy a property without having to borrow, or more likely be given, huge sums of money from mum and dad (from their pension and savings pot) only to hand it over to Estate Agents and mortgage lenders. Far too many people and their lives are being hurt and damaged by stupidly high house prices - but estate agents, mortgage lenders and many BTLers just don't care what damage and difficulties they cause. The tide has turned and estate agents and BTLers are going to suffer. Many Banks/mortgage lenders will survive no problem but some will (are) suffer(ing) very badly, eg Northern Rock. If you think the credit crunch is being over stated then you really had better learn some basic economics - the world economy is in major difficulties and we are in for several bad years that will hit the housing market severely.
- Doug, Birmingham
When everything was going well, the Prime Minister said it was all due to his skills, so he must take the blame now. But Nu Labour don't take responsibility for anything that goes wrong, do they?
- Bill, London
In my opinion, it's only a problem if you are looking to downsize and release some "capital" or can't afford the payments.
I do wonder why some people seem to hate the "Buy to Let" landlords? They took a punt and it paid very well for them.
It was a gamble. If they got in and out at the right time, they made money. If they made the wrong choices, they lost it.
Who can blame them for wanting to do something positive for themselves? (apart from anyone who is simply jealous of their success?)
- Jeremy, Hampshire, UK
I welcome a fall in the price of property. As a parent it seems clear that unless residential property becomes affordable there is little chance of my children ever being able to afford to buy their own place.
- Peter Buttery, London
I partly agree with Doug. A drop in house prices is relative, if the price of your property drops 50% so does all the price of all other property so you are neither losing or winning. The problem with high house prices is that it stops new buyers being able to afford property.
- Dardellion Montblanc, London, UK
There is only one reason for all the increases of propertry prices over the last 10 years. Greed. Greed by everyone, buyers sellers, estate agents and banks. Everyone wants to make that million so that they can pull out of the mad mad mad world. It aint gonna happen folks. You're all chasing a rainbow.
- Jon Vickers, USA
I agree with Doug - a 50% drop wouldn't bother me either. My current flat is worth £500k. Similar flats in my dream areas are at least £800k. So, whilst a 50% drop would put my flat at £250k it would mean my dream flat would now be £400k - so instead of a £300k difference I would 'only' have to find an additional £150k. It's those people downsizing or mortgaged to the hilt who would suffer a big house price drop (and of course those lovely buy-to-letters!)
- Carl, London
It's always worth remembering that house prices are a matter of opinion. Debt, however, is reality. It's a tough call whether it's the fault of the lenders for their lax practices or the borrowers for their short sightedness.
The key question is, if you believe the forecasts in your article, what will be the reaction of the 'buy-to-let' landlords to a falling property market. Where I live most new developments are 'sold' but remain unoccupied as landlords compete for tenants. With the fact that capital values are falling and investors are receiving no recurrant rental income there would not seem to be much point in holding residential property as an investment unless one is taking a very long-term view. Presumably buyers will return at some point, maybe when prices are 20% or more down from present levels. The short term looks gloomy.
- Dave Hedges, London
There is not one person in this country who would want the value of their own property to drop by 50%. You are either on a massive wind up or just a complete moron, maybe both.
- Jon, Radlett
Doug, how have you determined that 3.5 times salary is the magic number? Too much is being made of the "iminant house price crash" and the wider "credit crunch". None of this is new in terms of history, the only thing that changes is that each time there is a "crash" it is caused by an event or chain of events that are not foreseen or never previously experienced. People should remain calm and sensible in the knowledge that in four or five years people will wonder what all the fuss was about (remember the dotcom crash?) in the full knowledge that it will happen again but for an as yet unexpected reason.
- Steve, London
Falling house prices is good news! It is about time the huge damage, economically and socially, that ridiculously high and rising house prices has done to millions of people and families in the UK. The greed of Estate Agents, mortgage lenders, etc. is utterly disgusting and I don't think they will receive much sympathy as their incomes collapse with crashing house prices. Instead of us (including parents helping out children) handing over huge chunks of our hard earnt money over to Estate Agents and lenders we will be able to keep our money for our pensions, savings, bills, and day to day quality of life. I already own a house and will be happy to see its value drop by 50% or more - I will still have exactly the same bricks and mortar as before and will be able to climb up the property ladder much more cheaply. Wait 2 to 3 years before buying and instead of getting a tiny studio flat you will get a 2 or 3 bedroom house for the same money. The Government should regulate mortgage lending by restricting loans to 3.5 times income so that we don't get the situation described in the above article and the damage done by the price boom years followed by the damage done by the price bust years. A massive house price bust is now inevitable - unless you believe Gordon Brown's claim that he will never allow 'boom and bust' to happen whilst he is in charge. Is there anyone but Estate Agents who believe this?
- Doug, Birmingham
