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May 28, 2008

Homeowners not learned lesson from 1990s

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by Kay Mitchell

Homeowners not learned lesson from 1990s

Research from AXA has revealed that current UK homeowners are more at risk of falling into mortgage arrears or having their home repossessed.

The insurance giant said the majority of homeowners have no protection in place to guard against possible financial hardship.

The company established that 90% of single earner families in the UK currently hold mortgages. However, just 16% of these families insure their income to make sure they can meet mortgage repayments.

AXA said UK homeowners have failed to learn the lessons of 1992 when the country last experienced a major economic downturn.

At the end of 1992, some 16.5% of households had experienced some form of mortgage payment difficulties while 3.54% of mortgagees were over six months in arrears, according to figures from the Council of Mortgage Lenders.

The decade long housing boom has meant that lenders have offered mortgage deals based on three or four times annual earnings, with some offering more than seven times, compared to the traditional 2.5 times earnings prevalent in 1992.

Furthermore, many people have taken advantage of the growing buy-to-let market and have become second homeowners.

Rising mortgage costs and increasing utility bills has mean that family expenditure budgets have been squeezed. The credit crunch has meant lenders tightening their lending criteria so credit is hard to come by.

As a result, homeowners have been stretched and would struggle if they were suddenly unable to work.

At the end of last year, the number of mortgages over 6 months in arrears was 0.48%, considerably below the 3.54% recorded at the end of 1992.

However, AXA analysis shows that if mortgage arrears at the end of 2008 were only half of that recorded at the end of 1992, then approximately 200,000 more households would be experiencing mortgage payment difficulties, leading potentially to much higher rates of repossessions and bankruptcies.

Commenting on the data, Iain Mallon of AXA said the economic growth experienced in the UK in the past 15 years has encouraged a short-term view of finances with a buy today and pay tomorrow attitude.

The most recent economic indicators are worrying but are at least partly offset by strong employment figures and relatively low interest rates compared to the last recession, added Mr Mallon.

It is nonetheless surprising that so few people have plans in place to provide for themselves and their families given how rapidly things can change, he continued.

At a time when some economists are suggesting that the chances of a full-blown recession are about 35%, insurance such as income protection or critical illness cover is more relevant than ever, concluded Mr Mallon.


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