Is the repo man coming for you?

Rising interest rates and a slowing housing market can be a disastrous combination for overstretched homeowners. In the last housing market slump, in the early 1990s, record numbers of mortgage borrowers had their homes repossessed.

At first sight, it does not look as if repossessions will return to those disastrous levels. In fact, statistics from the Council of Mortgage Lenders indicate that in the second half of 2003, mortgage arrears and repossessions were at their lowest levels for 20 years. And the council recently revised its projections of repossessions downwards, to just 8,000 for this year and 9,000 for next year.

However, it is difficult to predict the impact of rising interest rates on the volatile combination of high numbers of new borrowers with large mortgage loans, coupled with unprecedented levels of consumer debt. Particularly worrying is the trend of consolidating debt by switching from unsecured to secured lending, which puts homes at greater risk.

The worst-case scenario is a sharp rise in mortgage arrears coupled with a property slump. Falls in nominal property prices would hamper attempts to clear debts through private sales, and repossessions would surge upwards.

But regardless of the macroeconomic trends, repossession repossession is always with us. As the case studies show, its direct causes are often changes in personal circumstances. Separation, longterm illness and unemployment are frequent precipitating factors.

The key piece of advice for householders who get into mortgage arrears is to contact their lender as soon as possible. Most mortgage companies follow the Mortgage Code, administered by the Mortgage Code Compliance Board. The code requires lenders to consider mortgage arrears sympathetically and positively. At the end of October this year regulation will pass to the Financial Services Authority (FSA). Its rules will be similar but more detailed, with a wider range of penalties for offending lenders.

'It was a defining time.' Ruth Whitehead of independent financial adviser RWA Finance faced repossession during the 1990s. She bought a house in Shepherd's Bush, west London, in a three-way deal with her partner and a friend. As interest rates began to escalate - her mortgage rate reached 16 per cent by 1993 - her relationship broke up and the other two moved out. She put the house on the market, but got no offers at all.

Whitehead struggled to pay the mortgage for three years. 'I was determined not to go down the pan. At that time I was a struggling musician and music teacher. I didn't have much money but I'd never been in serious debt.' She finally managed to sell the property and break even 24 hours before a repossession order came into effect. The experience changed her life, prompting her to abandon her musical career for employment in financial services.

Whitehead points out that relationship break-ups can produce serious debt problems: 'People can get into an adverse situation through no fault of their own.' She believes that the situation has improved for homeowners with arrears over the past decade. 'Generally speaking, lenders are far more civilised about repossession nowadays. They are more willing to listen to the problems that homeowners might face.'

Richard Gill's story illustrates the fact that the part rent/part buy deals which have become popular during the past few years can be hazardous. Gill and his wife bought a house in Guildford, Surrey, through Rosebery, a local housing association. Mr Gill, 42, was the manager of a plumbing centre and his wife was also working. The property cost ?150,000.

The Gills paid half with a mortgage; the housing association kept the rest of the equity and charged the Gills rent on it. In August 2002, the relationship ended. Richard was looking after the two children and payment difficulties arose immediately. 'I was living in the property, trying to keep it going, and digging a big black hole for myself. The property costs had been budgeted on the basis of two people's earnings. When I paid the rent and mortgage that was more or less my wages gone.'

He began to cover living expenses by juggling credit cards. 'I must have had about eight of them.' When mortgage arrears built up, his mortgage company was unsympathetic. 'They started legal proceedings against me without even contacting the housing association.'

His local citizens advice bureau assisted him, and his court hearing in February this year went well, despite the mortgage company pressing for immediate repossession.

'The judge advised me to contact the local council and said, "Mr Gill can have as much time to sort out his accommodation as he needs".' He now lives in a council flat: 'I'm sort of back on my feet. The flat's not too bad, although there's no garden and I'd like one for the kids.'

Citizens Advice Bureaux, www.nacab.org.uk, 020 7833 7000; Council of Mortgage Lenders: www.cml.org.uk, 020 7437 0075; Financial Services Authority: www.fsa.gov.uk, 0845 606 1234; PayPlan: (free debt advice) www.payplan.com, 0800 0854298; National debtline: www.nationaldebtline.co.uk, 0808 808 4000