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Mortgage arrears fall to lowest level since mid-2000s

Mortgage arrears fall to lowest level since mid-2000s
 Karolina Grabowska via Pexels

New mortgage arrears cases have reached their lowest level since the global financial crisis of 2008, but rate rises could lead to more arrears, a tax advisory firm has warned.

According to Paul Rouse, partner at Mazars, there were just 8,597 new cases of arrears by the end of 2021, compared to 40,000 a quarter at the height of the global financial crisis.

But Rouse warned this good news might not last, with an increase in arrears seemingly 'unavoidable'.

He said given the Bank of England’s recent interest rate rise from 0.10 per cent to 0.25 per cent - and more on the horizon in 2022 - it may be "inevitable" that more mortgages fall into arrears.

Over the past decade, record low interest rates created an environment where homeowners had been able to avoid arrears as mortgage providers followed the BoE's base rate down.

In recent years, increased savings and reduced expenditure during lockdown and the effects of the furlough scheme have also contributed to driving mortgage arrears down.

Banks also contributed to the low level of defaults on mortgages by following Financial Conduct Authority guidance in 2020 to show forbearance to borrowers in difficulty during the pandemic.

According to Mazars/BoE data, the total number of mortgages in arrears is also near record lows, with 122,061 cases in total in the UK at present.

But inflation has reared its head, with UK GDP having been widely forecast to increase by nearly 5 per cent in real terms this year, and inflation expected to touch 6 per cent and unemployment at just over 4 per cent.

Rouse said: "With interest rates rising to combat inflation – we may in turn see mortgage rates and arrears go up soon. If the Omicron variant persists it may delay the rise but an eventual increase is inevitable.

“The danger if interest rates continue to rise some who have been comfortably repaying their mortgages may begin to struggle.

"While the vast majority of home owners can repay their mortgages at the current interest rates without difficulty, many would find it significantly more challenging if interest rates were 5 per cent or higher.”

Lower rates for longer?

In March 2009, the BoE put the rate down to 0.5 per cent, the lowest level it had been since October 1694, when the Bank first began recording rates.

It stayed at this level until August 2016, when it dropped briefly to 0.25 per cent following the vote to leave the EU in June of that year, before rising again to 0.5 per cent in 2017.

Since then, the BoE merely tinkered with the levels, dropping them to 0.1 per cent as a result of the Covid-19 pandemic.

With lower base rates, borrowers have enjoyed lower levels of interest on their mortgage loans.

Even at the start of 2022, mortgage lenders were lowering some rates to encourage potential homeowners. 

For example, the Nottingham welcomed in 2022 by announcing rate drops of up to 70 basis points across its residential range.