MortgagesJul 20 2021

Defaults and negative equity could hit borrowers

Search supported by
Defaults and negative equity could hit borrowers

Defaults and negative equity risk could be on the horizon for UK borrowers, experts have said referencing recent data.

The Bank of England predicted “a rise” in defaults on secured loans to households between July and September, after default volumes in the previous three months “remained unchanged”.

It also estimated demand for secured lending on house purchases would fall over the next quarter, having climbed in the three months to June - the month the stamp duty holiday was beginning to taper.

Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said: “While the tap is firmly turned on, some borrowers risk sinking underwater, and defaults on all kinds of household borrowing are expected to rise."

In recent months, more lenders have re-entered the 95 per cent loan-to-value mortgage market. Accord, Metro Bank, and Newcastle Building Society are just some of the lenders which have been fleshing out their products for small deposit borrowers.

But despite lenders increasingly willing to lend, Coles said “ it’s not all going swimmingly for borrowers”.

She continued: “As the furlough scheme is phased out over the summer, there’s a good chance that there will be job losses, and people who have been struggling to keep their head above water will finally succumb.”

The final mortgage holidays are set to end this month, putting an end to industry-wide schemes. “It means borrowers will have to rely on whatever they can arrange with their lender,” Coles explained.

As well as fears of oncoming defaults, data published by mortgage comparison site showed that out of the 1,501 first-time buyers it surveyed, about a third (31 per cent) fear experiencing a house value drop or negative equity.

This was compounded with 22 per cent of respondents, which said they worried they won’t be able to afford their mortgage in the long-term.

Signs of a dwindling housing market began in April, when UK house price growth slowed for the first time since the implementation of the stamp duty break in July.

Between March and April, the Office of National Statistics’ house price index showed average prices on a seasonally adjusted basis fell by 2.2 per cent. 

It has since evened out, but the dip prompted Rob Barnard, Masthaven Bank’s intermediaries director to note the reality - which he said was “that the figures mask an underlying fragility”.

Karen Noye, a mortgage expert at Quilter, pointed out that whilst the government’s 95 per cent loan-to-value scheme which kickstarted a trend in lenders rejoining the space “has been a lifeline for many first time buyers”, other borrowers could be left out in the cold.