Bank to warn of meltdown over giant home loans

Record house prices are forcing people to take on the sort of debts to buy a home which would have horrified previous generations.

• Average house price has shot up £25,000, survey reveals

Nearly one in 10 home-owners have borrowed more than £150,000, with many borrowing home loans for £300,000, £400,000 or even more.

Figures, published today by the Bank of England, show an alarming rise in home-owners struggling to keep up with their huge financial commitments.

For the fourth consecutive year, there has been a rise in the number saying they have had 'difficulties' paying their mortgage.

The new figures show 7.7 per cent of home-owners who have a mortgage are having problems, equal to nearly 900,000 households.

It follows a recent warning from the Bank's powerful governor, Mervyn King, that households should 'think very carefully' about taking out a mortgage.

He said: 'All lenders and borrowers should think very carefully before they either lend or borrow.'

Over the last year, there has been a sharp rise in the number of people who are losing their homes, or risk being evicted.

The number of homes being repossessed jumped 76 per cent to 8,140 between January and June this year, compared to the same period last year.

And there has been a 20 per cent jump to 15,070 in the number of people who have not paid a single penny of their mortgage for more than a year.

A typical person having problems paying their mortgage every month earns about £30,000, the Bank of England said yesterday.

But they have total debts, including credit cards and personal loans, of three times this amounts of nearly £93,000.

For many, the desperate fight to keep a roof above their heads means they pay their mortgage, but store up a crisis for the future by letting the interest on other debts pile up.

The situation is being fuelled by banks and building societies making it easier for people to borrow money on mortgages and other loans.

Of the 1,844 people interviewed for the Bank of England, one in four said they find it 'easier' to borrow money than they did last year.

Abbey, Britain's second-biggest lender, changed its rules and will now routinely let anybody borrow five times their salary, possibly even seven times if they are seen as low risk.

Several lenders, such as Northern Rock and Halifax subsidiary, Birmingham Midshires, will lend 125 per cent of the value of a home.

Nick Gardner, director of Chase De Vere Mortgage Management, said: 'It is quite possible that if people borrow the maximum they can get away with, they will be over-stretching themselves.

'It may then only take one or two rate rises to put such a squeeze on their finances that they can no longer make ends meet.'

The debt charity, Consumer Credit Counselling Service, warned such generous lending rules can look like 'the answer to their [home-buyers] prayers.'

Chairman Malcolm Hulston said: 'It risks taking them into very dangerous territory. They are going to be very heavily stretched and, if their salaries don't go up in the way they think they are going to, they could find themselves dangerously over-stretched.'

The silver lining with mortgage debt is the huge amount of money which home-owners have tied up in their homes, the Bank of England said. About 30 per cent of home-owners with mortgages have more than £140,000 of housing equity, compared to less than five per cent in 1995.

Over-spending and 'higher than expected' household bills were two of the most common reasons blamed by people who are struggling with debts.

The total debt mountain from mortgages to credit cards is now £1.3 trillion, with more than £1 trillion in mortgages alone.

As the number of insolvencies soars, a staggering one in four people now know somebody who has become bankrupt over the past year.

The Bank of England's research added: 'Those who know a bankupt person are somewhat more inclined to consider bankruptcy themselves.

'That is consistence with the idea that a rising bankruptcy rate softens attitudes towards it.'