When repossession seems the only way out

In scenes reminiscent of the dark days of the last recession, mortgage lenders and debt charities are seeing desperate owners offering their homes for repossession. Four of the UK's biggest mortgage lenders have said that people are simply posting them the keys and walking away from the properties rather than face court action.

One big high street lender, which wished to remain anonymous, has seen a threefold increase in people voluntarily surrendering their properties for repossession: "This is a definite trend and harks back to the early 1990s when hundreds of people who couldn't pay their mortgages just posted us their keys. Instead of doing this, people in arrears should talk through their options with their lenders and a debt charity," a senior figure said.

That this is happening at the start of a recession will ring alarm bells with policymakers as it's likely that the trend will grow in the coming months. Only last week, Mervyn King, the Governor of the Bank of England, forecast that the UK economy would shrink next year. At the same time, a barrage of job cuts hit the economy; with employers such as Virgin Media, Yell, GlaxoSmithKline and BT announcing major lay-offs.

The Bank cut interest rates from 4.5 to 3 per cent in an attempt to ward off the worst of the recession, but this is taking time to feed through to lower mortgage payments, particularly as more than half of borrowers are on fixed-rate deals.

The debt charity National Debtline, which has reported an increase in calls, said that consumers are becoming desperate: "Many callers are saying that they are thinking about simply handing over their keys to their mortgage lenders as they can not cope with the repayments, perhaps due to job loss or generally a deteriorating financial situation," said Beccy Boden Wilks from the charity.

"Perhaps they think by handing over their keys they will at least ensure that the property is sold now at auction by the lender and that it gets the best possible price. They figure that if they leave it, then the price will only fall further and they could be left still owing part of the mortgage after the property has been sold at auction."

However, entering voluntary repossession is a million miles away from a magic bullet solution, said Ms Wilks: "It can take months to sell the property at auction and it could be at a knock-down price, so there could be a shortfall to pay. If you are left owing money, the lender can come back, years later, and ask for the cash. If you are considering surrendering your keys then take advice, draw up a budget and see what you can afford to pay the lender. Remember, courts want to keep people in their homes as much as possible."

The Consumer Credit Counselling Service (CCCS) said that it too has seen a rise in the number of clients saying that they are about to give up their keys: "It's a cry for help," said Malcolm Hurlston, the CCCS chairman. "The unfortunate thing is, though, that out of the thousands of people we advise, around a third ultimately can't stay in their homes."

Legally, mortgage lenders have 12 years after last contact to chase up a shortfall. However, under a voluntary agreement between the Council of Mortgage Lenders and its members, anyone who has not been contacted by their lender within six years from the date of sale will not have to cover any shortfall. Often what happens, though, is that mortgage lenders sell on bad debts to a third party who then pursue the debtor to the legal time limit.