Court orders ‘on the up’ as banks get tough
It is the most basic piece of personal financial advice that can be given: never spend more than you can pay back. However, in boom-time Britain, it was advice that seems to have been ignored by many. Consumers awash with cheap money from low inflation, strong growth and sky high and rising house prices treated themselves as never before to spending sprees funded by credit cards and personal loans - and, occasionally, by borrowing against their own properties. This led to record personal debt of £1.4 trillion in the UK, according to October 2007 figures from the charity Credit Action.
However, with the coming of the credit crunch last year, all this has changed - not least at the epicentre of the boom, the housing market. Halifax says that overall property prices dropped by 2.5 per cent last month - and other recent surveys, while not registering such a big drop, also suggest that house price inflation has come to a halt.
Needless to say, this could prove bad news for many homeowners - particularly if they borrowed their mortgage loan at the very threshold of what they could afford and depend on continued economic growth for repayment rates to be kept competitive. Of course, banks lose out along with their customers if repayments cannot be met. Faced with the possibility of a price crash, mortgage lenders have drastically toughened-up their criteria for lending to new customers and have withdrawn around 60 per cent of mortgage deals in a bid to cut out high-risk customers, according to financial website Moneyfacts.co.uk.
What's more, this new-found risk-aversion appears to have spread into banks' unsecured lending policies, as new figures from the Ministry of Justice show that British banks are cracking down sharply on irresponsible credit card and loan borrowers. Lenders sought court orders in order to secure personal debts of this kind on customers' homes over 130,000 times last year, the government says. This is a 42 per cent rise on the previous year - and shows that many banks are worried that they cannot recoup on the debts without such a guarantee.
While it is rare for such a "charging order" to result in repossession, the increase does provide a window into the nervousness being felt by financial institutions in the current climate. Speaking to the BBC, Mark Sands at accountants KPMG agreed. "Lenders are looking at all options to get their money back," he commented. "You take on an unsecured loan or credit card, you fall into arrears, the bank decides to take you to court, and if you still don't pay you end up with a charge imposed on your house by the court." John Fairhurst at debt advisory company Payplan also commented that lenders are "worried about people's ability to repay" at the moment.
Despite this gloomy outlook, there are many potential beneficiaries from the current risk-aversion among financial firms - and many valuable money-related lessons that can be derived from the credit crisis. Firstly, those who avoided excessive unsecured borrowing will have nothing to fear from the spate of "charging orders" - and, indeed, will be less likely to borrow too much from such sources in future. Secondly, the advisability of saving prudently and amassing a significant lump sum to buy a home - rather than splashing out for a property worth more than can be comfortably afforded - has been sharply brought home for many.
High earners, seeking mortgages for professionals, are also set to benefit from a static housing market. A slowdown in price rises as overall salaries continue to rise could make better homes more affordable for key workers such as doctors, lawyers and accountants. This group will also prove more attractive to lenders, as their salaries tend to sharply increase over time - making them comparatively risk-free to give a mortgage to.
Significant cuts to the base rate of interest from the Bank of England - 0.75 per cent in recent months - and unprecedented steps from the government last week to guarantee £50 billion of revenue-raising bonds for mortgage lenders will also help. But a nationwide reining-back on spending beyond their means could be the biggest boon of all in the long run.
However, with the coming of the credit crunch last year, all this has changed - not least at the epicentre of the boom, the housing market. Halifax says that overall property prices dropped by 2.5 per cent last month - and other recent surveys, while not registering such a big drop, also suggest that house price inflation has come to a halt.
Needless to say, this could prove bad news for many homeowners - particularly if they borrowed their mortgage loan at the very threshold of what they could afford and depend on continued economic growth for repayment rates to be kept competitive. Of course, banks lose out along with their customers if repayments cannot be met. Faced with the possibility of a price crash, mortgage lenders have drastically toughened-up their criteria for lending to new customers and have withdrawn around 60 per cent of mortgage deals in a bid to cut out high-risk customers, according to financial website Moneyfacts.co.uk.
What's more, this new-found risk-aversion appears to have spread into banks' unsecured lending policies, as new figures from the Ministry of Justice show that British banks are cracking down sharply on irresponsible credit card and loan borrowers. Lenders sought court orders in order to secure personal debts of this kind on customers' homes over 130,000 times last year, the government says. This is a 42 per cent rise on the previous year - and shows that many banks are worried that they cannot recoup on the debts without such a guarantee.
While it is rare for such a "charging order" to result in repossession, the increase does provide a window into the nervousness being felt by financial institutions in the current climate. Speaking to the BBC, Mark Sands at accountants KPMG agreed. "Lenders are looking at all options to get their money back," he commented. "You take on an unsecured loan or credit card, you fall into arrears, the bank decides to take you to court, and if you still don't pay you end up with a charge imposed on your house by the court." John Fairhurst at debt advisory company Payplan also commented that lenders are "worried about people's ability to repay" at the moment.
Despite this gloomy outlook, there are many potential beneficiaries from the current risk-aversion among financial firms - and many valuable money-related lessons that can be derived from the credit crisis. Firstly, those who avoided excessive unsecured borrowing will have nothing to fear from the spate of "charging orders" - and, indeed, will be less likely to borrow too much from such sources in future. Secondly, the advisability of saving prudently and amassing a significant lump sum to buy a home - rather than splashing out for a property worth more than can be comfortably afforded - has been sharply brought home for many.
High earners, seeking mortgages for professionals, are also set to benefit from a static housing market. A slowdown in price rises as overall salaries continue to rise could make better homes more affordable for key workers such as doctors, lawyers and accountants. This group will also prove more attractive to lenders, as their salaries tend to sharply increase over time - making them comparatively risk-free to give a mortgage to.
Significant cuts to the base rate of interest from the Bank of England - 0.75 per cent in recent months - and unprecedented steps from the government last week to guarantee £50 billion of revenue-raising bonds for mortgage lenders will also help. But a nationwide reining-back on spending beyond their means could be the biggest boon of all in the long run.
