Recent data from the Bank of England’s quarterly survey reveals that residential mortgages in the UK have hit a seven-year high in arrears, totaling £16.9 billion in the three months leading up to June 2023. This figure reflects a notable 28.8% increase compared to the same period in the previous year.
This concerning surge in mortgage arrears is primarily attributed to the relentless rise in borrowing costs. Over the past two years, the Bank of England has implemented 14 consecutive interest rate hikes, leading to higher mortgage rates for homeowners.
Experts anticipate another 0.25 percentage point rate hike, taking the central bank’s rate to 5.5%, as part of efforts to combat inflation.
Lewis Shaw, founder of mortgage broker Shaw Financial Services, expressed deep concern over the pace at which mortgage arrears are accumulating. He warns, “This is concerning data, especially considering that 1.6 million mortgage holders are due to renew their loans over the next year at substantially higher rates than they have experienced in over a decade.”
Despite the stark figures, it’s crucial to maintain perspective. Arrears are defined as borrowers failing to meet contractual payments equal to at least 1.5% of the outstanding balance or in cases of property repossession. While these numbers are disconcerting, they remain relatively low when compared to the depths of the 2008-09 financial crisis.
Furthermore, the data also indicates a decrease in the outstanding value of all residential mortgage loans by £19.9 billion, or 1.2%, totaling £1.66 trillion compared to the previous three months. This marks the most substantial drop in both absolute and percentage terms since record-keeping began in 2007.
Despite the uptick to 1.02% in total loan balances with arrears, the highest since Q1 2018, these figures still fall far short of the all-time peak of 3.64% witnessed in Q1 2019. Stricter regulations surrounding mortgage affordability, introduced post-financial crisis, have played a pivotal role in curbing arrears. Moreover, the full impact of higher interest rates has yet to affect many households on fixed-rate deals, such as two-year and five-year agreements.
Looking forward, experts caution that the true extent of the issue may not have fully materialized. Jamie Lennox, director at Dimora Mortgages, highlights that “much of the repercussions of 14 consecutive base rate increases have yet to become evident.” As more homeowners transition from ultra-low-rate deals in the coming months, the percentage of arrears could significantly rise.
The Bank of England’s data also points to a decline in the share of gross mortgage advances for buy-to-let purposes, currently standing at 8.1%—the lowest level recorded since Q4 2010. This shift can largely be attributed to increasingly stringent tax laws affecting buy-to-let investments, which have made them less attractive to landlords.
In summary, the UK’s mortgage market is facing unprecedented challenges due to rising interest rates. With the potential for further financial strain on the horizon, homeowners and lenders alike are preparing for a challenging period ahead.
Photo: Manchesterphotos – Own work
By: Montel Kamau
Serrari Financial Analyst
12th September, 2023
