Next year looks challenging for the mortgage industry with interest rates expected to rise further, dampening demand in the housing market and potentially causing prices to fall.
Many fear that higher mortgage rates alongside a cost-of-living squeeze will see more homeowners struggle to meet payments.
Those moving from low-cost, fixed-rate deals onto higher-paying alternatives will be particularly badly hit, along with others who have maximised borrowing to get on, or move up, the housing ladder and who may, as a result, have little financial headroom to cope with escalating bills.
Your Mortgage Decisions director Dominik Lipnicki says there are also increasing numbers of people out of work for health reasons, which will affect some borrowers’ ability to meet mortgage payments.
Repossessions
All these factors are likely to mean mortgage arrears will rise next year. In the most serious cases, this raises the spectre of increased repossessions, particularly if falling prices lead to negative equity for more recent buyers, trapping homeowners in properties where they can no longer service the mortgage.
SPF Private Clients chief executive Mark Harris says: “Although repossessions remain at relatively low levels, given rising living costs, mortgages and interest rates it is highly probable that these numbers will rise.
Nationwide has details on its website, and TV ads promoting its cost-of-living help
“Lloyds and Nationwide recently increased their provision for anticipated arrears and we expect other lenders to follow suit.”
Despite these concerns, there has been no significant increase in mortgage arrears this year, although repossession figures have started to edge upwards. According to UK Finance, there were 74,440 homeowners in mortgage arrears in the third quarter (Q3) of 2022 — a 1% drop from Q2. This is broadly in line with pre-Covid levels.
However, UK Finance’s data shows there were 1,910 repossessions in the first three quarters of 2022 — up from 1,230 during the whole of 2021.
Since the financial crisis, lenders have got better at communicating with clients, but service levels vary
This increase has been skewed, though, by the Financial Conduct Authority’s banning of repossession activity at the start of the Covid pandemic. Such activity was allowed to resume from April 2021, leading to a backlog of cases.
But repossessions can rise steeply during periods of economic stress. In 2009, in the wake of the global financial crash, 48,900 repossessions occurred. The worst year on record is 1991, when there were 75,500 repossessions. This was two years after the housing market had crashed and interest rates had spiked to 14%.
Archived figures from the Ministry of Justice show that repossessions remained high throughout the 1990s and were a long-term blight on the mortgage industry.
Brokers and lenders do not anticipate problems on that scale in the next few years.
Stress-tests
One reason is tighter lending regulation, particularly around affordability. Mortgages for Business head of residential Neil Bishop says this stems from the Mortgage Market Review that followed the 2008 financial crash.
“Reforms required lenders to stress-test borrowers’ affordability when they underwrote mortgages, to ensure payments remained affordable should rates rise,” he says.
Lender forbearance has been highly successful in preventing major issues for homeowners
The recent jump in mortgage rates will now stress-test those stress-tests for the first time.
North London estate agent and former Royal Institution of Chartered Surveyors residential chairman Jeremy Leaf says: “We are told that mortgages have been stress-tested quite a bit above actual payment levels for some time, so hopefully the pain in terms of repossessions will be relatively modest this time.
“Of course, there are exceptions and individual circumstances vary. But it is not in the interests of lenders to precipitate a sharp fall in property prices, which is only going to be prompted by a significant increase in repossessions.”
Early action
Another mitigating factor is more proactive action by lenders to address arrears early and offer tailored support to help borrowers remain in their homes.
L&C Mortgages associate director David Hollingworth says: “Lender forbearance has been highly successful in preventing major issues for homeowners.”
This has helped keep repossession numbers low in recent years, he says, although lenders’ actions have been helped by a decade of low interest rates and a buoyant housing market.
The pandemic has put further stresses on lenders’ call centres and, in some cases, borrowers will struggle even to get through
“Lenders will now be preparing for tougher times and ensuring they can help their borrowers deal with the rising cost of living, particularly as more borrowers reach the end of existing fixed rates and have to take on much higher rates,” he adds.
UK Finance says forbearance options include extending the length of mortgage term, changing the type of mortgage (such as a temporary change to an interest-only option), short-term payment holidays or capitalising the interest accrued — in other words, adding this to the balance of the loan.
Not all these options were available during previous periods of rising unemployment, falling house prices or economic uncertainty.
Assistance measures
More recently, during the Covid lockdown, the industry extended the support available to struggling homeowners. While the regulator had effectively banned repossession activity, mortgage lenders agreed to offer mortgage holidays on request, typically extended from three to six months.
Hollingworth says: “During the pandemic, payment holidays were rolled out on a grand scale for anyone who wanted them, with longer-term implications initially removed so that credit files would be unaffected.”
Lenders will be preparing for tougher times and ensuring they can help their borrowers deal with the rising cost of living
Given the severity of the crunch on household finances, there has been debate on whether similar measures should be reintroduced in 2023. Money champion Martin Lewis has called for high-level meetings between government ministers and the mortgage industry to discuss how best to support those struggling with payments next year.
There has been some limited government action to date. In the Autumn Statement, the Support for Mortgage Interest scheme was expanded, enabling those on Universal Credit to apply for a loan from the government after three months, rather than nine months.
But UK Finance says there is unlikely to be a return of the Covid payment holidays. The trade body pointed out that lockdown had been a temporary measure. In contrast, the current cost-of-living crisis could last for years.
Brokers agree that short-term payment holidays, which delay and ultimately add to the debt owed, may be less effective in these circumstances and could simply store up future debt problems.
Mortgages have been stress-tested quite a bit above actual payment levels for some time
Bishop says: “The so-called mortgage holidays during Covid were in reaction to an unprecedented global economic situation. Unfortunately, recessions are part of our economic cycle and seem to happen, with varying severity, every decade or so.”
Nevertheless, some brokers, such as Lipnicki, say they would like to see more ‘targeted’ payment holidays put in place.
‘Workable’ solutions
Brokers point out it is in lenders’ interest to find ‘workable’ solutions for borrowers in financial difficulties.
Some brokers say, instead of introducing new measures, lenders just need to be more consistent when applying existing support, and to ensure those experiencing financial difficulties can get through to their lender quickly and easily.
Lipnicki says: “Since the financial crisis, lenders have got better at communicating with clients, but service levels vary and there is still much inconsistency across the providers.”
He says the help that may be offered to borrowers can differ, even from the same lender.
Lloyds and Nationwide recently increased their provision for anticipated arrears and we expect other lenders to follow suit
“Frustratingly, service standards can be different depending on who answers the phone. The pandemic has put further stresses on lenders’ call centres and, in some cases, borrowers will struggle even to get through.”
This situation is far from ideal, particularly given the current financial stresses many people are under, and Lipnicki calls for lenders to address this issue.
Joined-up approach
Those falling into financial difficulties are advised to speak to their lender at the earliest opportunity.
Brokers have a role in communicating this message, and letting borrowers know where to go for help, ideally before problems arise.
Private Finance technical director Chris Sykes says some lenders have been particularly good at addressing this issue.
It is not in the interests of lenders to precipitate a sharp fall in property prices
“Nationwide is a great example,” he says. “It has good information signposted on its website, and TV adverts promoting its cost-of-living help.”
Brokers also want a more joined-up approach from lenders, debt charities and helplines. This can help borrowers take a more holistic view of their finances.
If homeowners can reduce the cost of other unsecured debt, this may help ensure that mortgage payments continue to be paid — assisting them, and lenders, in weathering the worst of the economic storm ahead.
This article featured in the December 2022/January 2023 edition of MS.
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