‘Tentative signs’ of early mortgage arrears increasing

‘Tentative signs’ of early mortgage arrears increasing

The most squeezed households face being pushed into arrears on their unsecured debts and mortgages as a result of increased living costs, UK Finance has said.

In its most recent Household Finance Review for the second quarter of the year, the financial trade association highlighted that despite the total number of customers in mortgage arrears falling for the fifth successive quarter, further and larger increases in arrears can be expected as the cost of living crisis bites. 

The continued downward trend in arrears comes despite rising costs of living and base rate rises totalling 115 basis points from last December to June, which have fed through to mortgage payments for around 2mn borrowers on variable rates. 

The most recent mortgage lending figures, released by the Financial Conduct Authority yesterday (September 13), showed an overall reduction in arrears for the second quarter of the year. 

From April to June 2022 the value of outstanding balances with arrears decreased by 0.7 per cent, and 7.2 per cent over the year to £13.2bn.

Total arrears are currently at the lowest level since records began in 2007, accounting for 0.80 per cent of outstanding mortgage balances.

UK Finance said this suggests that at an aggregate level, cost-of-living pressures have not yet affected households’ ability to pay for their monthly outgoings, but it highlighted two indicators showing signs of this trend reversing. 

“Firstly, the number of borrowers in heavier arrears – representing 10 per cent or more of the mortgage balance – has fallen for the second successive quarter,” the report said. 

This provides evidence that the backlog of heavier arrears cases, as a result of the possessions moratorium, is now starting to clear according to UK Finance. 

However, early arrears cases representing 2.5 and 5 per cent of the balance, saw a small increase by 170 cases to 25,160 in Q2. 

“Although this rise in itself is very small it follows a period, beginning in Q3 2020, when these early arrears cases fell significantly - by a cumulative total of 7,560 cases until this most recent quarter. 

“Reportable mortgage arrears take some time to build up and so inflation early in the year, as well as the first interest rate rises, were not expected to feed through to arrears figures at that stage,” the report said. 

UK Finance expects the combined pressures from interest rate rises and inflation will remove a significant proportion of free disposable income for households, while some will face difficulties in meeting their mortgage and other credit commitments. 

Natasha Percy-Baxter, adviser at PercyBaxter Wealth Management and a St James’s Place partner, said it is important that advisers ensure their clients understand their cash flow, so that they know where they can reduce their disposable expenses to help pay increasing essential ones.

“As the average household sees its overall costs rising this will put pressure on the payments they can cover. 

“Mortgage lenders would prefer the loan to be repaid rather than having to repossess properties and are usually open to finding a working solution. This is why I would recommend to any clients worried about falling into arrears, that they should call up their lender as one of their first port of calls, to see if they can find a way to make the payments more manageable," Percy-Baxter said.