Lenders demand rise in Income Support for Mortgage Interest

Today’s meeting between the Chancellor of the Exchequer and mortgage lenders is likely to see renewed calls from banks and building societies for the Government to review Income Support for Mortgage Interest payments.

Currently, the benefit is only payable when a homeowner has been unemployed for nine months and lenders keen to see measures to prevent a rise in repossessions, will be demanding an earlier start date.

In addition, the benefit is capped and will only pay interest on mortgages of up to £100,000, which may have been generous when the level set in 1995 but would exclude large numbers of homeowners today, because the average size of a new mortgage is around £160,000.

While repossession continue at historically low levels, they are rising and Michael Coogan, director general of the Council of Mortgage Lenders, is arguing that the prospect of an economic downturn makes it essential for the Government to offer homeowners an improved safety net.

The Council is predicting that repossessions could reach 125 a day in the months ahead and some experts regard even this as optimistic.

There is also unease about the number of people who could be facing negative equity.

Last week, Morgan Stanley, the investment bank, predicted that UK house prices will fall 15% over the next two years, leaving 1.2 million homeowners in negative equity.

Meanwhile, economic forecasting agency, Capital Economics, has revised earlier forecasts of a decline in UK property prices from 13% by the end of 2009, to 20%.

A fall on this scale could reduce the cost of an average home from around £185,000 to around £148,000 and would be particularly bad news for homeowners who borrowed 100% or 125% of their property’s value in the months before the credit crisis and housing market downturn.

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