Middle England is caught in debt trap as house prices fall and job hopes dim
Increasing numbers of middle-class families are being caught in the debt trap as house prices continue to fall and job prospects diminish, a new report suggests.
Plunging property prices have cut off access to additional funds for many homeowners who relied on remortgaging their property to pay off credit-card debts and personal loans, forcing many into financial difficulties as they struggle to meet their repayments.
The proportion of homeowners being forced to declare insolvency has doubled since 2007 and is set to rise further, figures from Grant Thornton, the accounting firm, show. Homeowners accounted for nearly 70 per cent of applications for individual voluntary arrangements (IVAs) received by Grant Thornton in 2008’s second half, up from 58 per cent in its first half and about 35 per cent in 2007’s first half.
Official figures released tomorrow are expected to show that the number of insolvencies jumped again in the final three months of last year after an 8.8 per cent rise in the third quarter.
IVAs, which are open to those with unsecured debts of £15,000 or more, give families or individuals a greater chance of staying in their home as part of the arrangement, whereas those who go bankrupt are usually forced to sell their property.
Mark Allen, head of IVAs for Grant Thornton, said that the “middle-class” IVA was becoming increasingly common. “The credit crunch has proved a double-whammy for homeowners who have been consolidating their debts by topping up their mortgages,” he said. “The practice is now more difficult and those with high levels of personal debt either have insufficient equity or negative equity and no chance of raising additional money.”
Michael Saunders, a Citigroup economist, said that about 1.2 million homeowners had been plunged into negative equity after a 20 per cent dive in house prices since the market peaked in autumn 2007. He expects this figure to double to three million by early next year as house prices continue to slide. There are about 12 million homeowners in the UK.
Chris Tapp, of Credit Action, a debt charity, said: “Middle England has been hit really hard by the recession, particularly by higher mortgage costs at the start of last year and falling house prices.
“The trend may soften slightly as more borrowers benefit from recent interest-rate cuts, but the spectre of unemployment is likely to more than offset this, and so unfortunately in 2009 we expect the number of IVAs to continue to rise.”
The news came as a leading debt charity said that the impact of further rate cuts for those in debt is likely to be muted. The Consumer Credit Counselling Service said that homeowners who have little or no equity in their home are likely to see little if any reduction in their mortgage rate and are prevented from remortgaging to a cheaper deal because they do not have a hefty deposit.
Repossessions gloom
A further surge in repossessions of homes is expected as increasing numbers of homeowners fall behind with mortgage repayments. Repossessions are estimated to have leapt more than 70 per cent to 45,000 last year and are expected to hit 75,000 this year. Nearly 170,000 homeowners were three or more months in arrears between July and September last year, figures from the Council of Mortgage Lenders show.
If you are looking for Debt Advice why not visit www.DebtAdvisersDirect.co.uk