The worst is yet to come for homeowners

Bad news for struggling homeowners: these trends will force banks to seize more homes next year...

When you buy a home, you need to be confident of three things:

• 1. that you can get a mortgage sufficiently large, when combined with your deposit, to afford the property in question;
• 2. that you can afford the monthly repayments (usually, because you're in work); and
• 3. that you can eventually repay your home loan and own the property before you retire.

What if?

Although they are fairly simple concepts, these three issues produce lots of questions. What if you die before you've repaid your debt? What if you lose your job or fall ill? What if interest rates rise steeply and your repayments double?

Of course, several of these worries can be dealt with by buying insurance. You can buy life insurance to repay your loan if you die, plus payment protection insurance to protect yourself against accidents, sickness and unemployment.

Sadly, despite a range of mortgage insurance policies, thousands of owners lose their homes every year. As the wealth warning says, "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it."

In other words, if you can't meet your monthly promise to your mortgage lender, then it will eventually take back your home, sell it and use the proceeds to clear your loan. This seizing of a mortgaged property is, of course, termed a 'repossession' -- and it's on the increase.

Rising repossessions

During the UK's periodic recessions, mortgage repossessions rise. This table shows the fall and rise in repossessions during the property cycle:

Mortgage repossessions, 1988 to 2008

* CML's latest estimate

As you can see, repossessions peaked at 75,500 in 1991 during the previous housing crash. They then fell steeply, reaching a low of just 8,200 in 2004. However, this year will see the highest number of repossessions since 1995, according to the Council of Mortgage Lenders (CML).

Down go the figures...

The good news is that the CML last year predicted that there would be 75,000 repossessions in 2009. Last week, the CML cut its estimate to 48,000, which means that it expects 27,000 fewer repossessions this year than forecast. That's almost 520 fewer repossessions per week, which is a welcome relief for struggling homeowners!

There are three key reasons why repossessions in 2009 have been lower than expected:

• First, mortgage lenders are being pushed by the government and the judiciary to exercise 'forbearance'. In other words, repossession should be used only as a last resort. Read more in New guidelines to help homeowners.

• Second, the government has introduced various financial-support schemes designed to keep homeowners in their homes, despite their mortgage arrears. Find out more in No job, no problem and Good news for worried homeowners.

• Third, with the Bank of England's base rate at a 315-year low of 0.5%, millions of mortgage borrowers are paying much less each month than they did when the base rate was 5% or so.

...But the worst is yet to come

Nevertheless, I am sure repossessions will rise again during 2010. Indeed, the CML expect 53,000 properties to be seized next year -- 5,000 more than this year's current prediction of 48,000. Therefore, with 11 million mortgaged properties in the UK, 1 in 208 homes (0.5%) could be seized next year. This would be the highest repossession rate since 1993.

What's more, I suspect that the CML is erring a little on the cautious side. After all, anything which hits disposable incomes is likely to cause increased mortgage arrears and repossessions. In the year ahead, we should be braced for the following setbacks (in A-Z order):

• Business failures: Insolvency group Begbies Traynor expects a 'deluge of insolvencies' next year. As many small-business owners have pledged their homes as security for business loans, business failures will boost repossessions.
• Interest rates: If inflation takes off again, the Bank of England will have to raise its base rate, perhaps in the second half of 2010. If rates start to rise steeply, a 'second wave' of repossessions is likely to begin.
• Payment shock: Hundreds of thousands of borrowers on ultra-low tracker and variable rates are currently being moved onto much higher interest rates, leading to big hikes in their monthly payments.
• Personal debt: Between September 1996 and September 2009, total personal debt (including mortgages) tripled from £481 billion to today's £1,459 billion. Currently, our debt burden is bigger than our economy, which should be a huge warning flag for British borrowers.
• Tax rises and spending cuts: In the 2009/10 financial year, HM Treasury will spend £175 billion more than it collects. The only way to fill this vast black hole is by cutting public spending and raising taxes. This will put a brake on the economy, and the longer they leave off applying that brake, the worse the UK's credit rating will be, which will send borrowing costs shooting up.
• Unemployment: Job losses usually lag any economic recovery. Hence, even as the economy starts to grow in 2010, unemployment is predicted to keep rising into next year.
• Wage freezes: Yesterday, business group the CBI warned that almost half of companies (47%) are planning a second year of wage freezes for 2010. After inflation (rising prices), millions of workers can look forward to lower disposable incomes next year.

The economic outlook

If I sound gloomy about the UK's prospects, it's because I haven't bought into the optimistic forecasts being thrown about by politicians, mortgage lenders, estate agents and others with a vested interest in talking up the housing market.

To be blunt, this is no ordinary recession we're experiencing. In 'normal' recessions, the economy goes into reverse before recovering after, say, one year. This one is deeper, because it's been accompanied by a credit crunch and a systemic banking collapse and subsequent bailout.

So far, the UK economy has got smaller for six quarters in a row, which is the longest downturn since quarterly records first began in 1955. In fact, I think it could be 2012 before the UK economy gets back to the peak size it hit in 2007, before the credit crunch, banking collapse and economic downturn laid us low.

In short, don't get your hopes up and keep saving, because we're not out of the woods yet...

More: Find your ideal mortgage | House prices won't fall for years | Yet another mortgage rip-off