The Perils of the Property Ladder: Has Anyone Noticed the Silence?

There was a time when every conversation was focussed on property and every other TV programme was about property makeovers. Everybody wanted to get into property and those already on the ladder seemed fixated on becoming wealthy overnight. Remember those media-nominated millionaires who bought property for thousands and sold it for a million? How excited we all were, rich - with hardly any effort.

But recently it's been rather quiet. Those who have yet to buy their first home have become sceptical, if not bored by chasing impossibly affordable homes and those who have bought property have become nervous, if not by the commentary that house prices are falling, but by the fact that they have bought property on top of other debts and the realisation that repayments are becoming more difficult.

According to the Department of Trade and Industry, bankruptcies are still on the increase, up almost a third on the previous year. In the latest debt statistics by Credit Action, UK economist Vicky Redwood from Capital Economics states that the level of personal debt is at breaking point:

"It is unlikely that the numbers have peaked but we estimate that households must be feeling the pain of borrowing too much. People are paying the equivalent of about 20 per cent of their disposable income on interest and debt repayments – the highest since 1990."

In a survey by the Citizens' Advice Bureau (CAB), the three most common reasons for debt problems were quoted as:

* Sudden change in personal circumstances – resulting typically from job loss, relationship breakdown or illness;

* Low income – the consequences of living for a long time on a low level of income; and

* Over-commitment – in some cases related to money mismanagement.

It is the third reason that is often highlighted in the context of mortgage borrowing. In a press release regarding the Chancellor's proposals to introduce cheaper mortgages, Keith Tondeur, Director of Credit Action warned that:

"At first glance the offer of help to first time buyers sounds useful. However this scheme comes at a time when after several years of steep rises the market is cooling. One question that we should be asking is whether this is being done to keep the housing market buoyant so that people feel confident and therefore keep on spending".

"House prices are undoubtedly too high for many people to afford which explains why numbers of first time buyers have been falling, with the average age of a first time buyer rising sharply. This scheme could therefore, if care is not taken, create a false market and lead to first time buyers taking on a large amount of long term debt that they could well struggle to repay."

The seduction of the property market may cause a vicious circle of debt: if people borrow more than they can afford, they may damage their credit record if repayments cannot be met. An adverse credit record will brand the borrower "sub-prime", and is likely to prompt less favourable credit options later in life. It is true that products such non-standard mortgages, adverse loans and adverse credit cards serve a purpose, but their rates will always be less favourable than standard products.

In addition to self-inflicted debt, it is also possible for your credit record to be manipulated by other parties. In June earlier this year, Callcredit issued a warning to guard against identity fraud when moving house.

"Homeowners who fail to check their credit file before they move and register themselves on the Electoral Roll once they have moved are at risk from:

* Identity fraud – a fraudster could obtain enough financial information about you from your rubbish to run up debts at your old address without your knowledge. People who just cut up cards and don't tell their lender are particularly at risk from this type of fraud.

* Credit refusal – a person's credit history has to add up to the lender when you apply for credit, if you don't appear on the Electoral Roll at your current address it will make it more difficult to get credit."

If you're thinking about buying a house, try the following sites for starting your own detective work in finding a good mortgage:

* Make sure your credit record is in good shape: ( http://www.checkmyfile.com/ )

* Don't be lazy, shop around for the best mortgage: ( http://www.moneynet.co.uk/ )

Make sure you keep your finances flexible; ensure you know what you can afford and for how long you can afford it. What was the best mortgage, current account, ISA account five years ago, may not be performing as effectively now.

About Rachel:

Rachel writes for the personal finance blog Cashzilla: http://www.cashzilla.co.uk

Cashzilla is a personalfinanosaurus.

"Rachel" means sheep in Hebrew: "little lamb" or "one with purity".

Cashzilla means financially savvy with great fiery ferocity.