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Clueless Brits doomed to repeat history?

Jaimie Kanwar

UK homeowners have failed to learn from the last major economic downturn, argues Axa...

Nearly 16 years since the last major economic downturn in the UK, new research by AXA has revealed that UK homeowners have failed to learn the lessons of 1992. According to the research:

• There are more people at risk of falling into mortgage arrears or having their home repossessed.
  
  
• The vast majority of homeowners have no protection in place to guard against possible financial hardship.
  
  
• Nine out of ten single earner families in the UK currently hold mortgages yet only 16% of these families insure their income to make sure they can meet mortgage repayments.

Figures from the Council of Mortgage Lenders show that at the end of 1992, some 16.5% of households had experienced some form of mortgage payment difficulties and 3.54% of mortgagees were more than six months in arrears. Since then the number of residential mortgages held in the UK has risen by around two million to 11,822,000. 

In the intervening 'boom' years many lenders launched 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, and many more people became second home-owners taking advantage of the fast-growing buy-to-let market.

Family budgets squeezed

In the last 10 years, family expenditure budgets have been further squeezed in a number of areas, but notably through increased spend on technology goods and services such as PCs and broadband. The result is that many homeowners are stretched to the limit already to meet mortgage repayments, so would struggle if they were suddenly unable to work.

At the end of 2007 the number of mortgages more than 6 months in arrears was 0.48% (or 56,800), well 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.

Worry economic indicators

Iain Mallon, Director of Protection Marketing at 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. 

"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. 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.