Mortgage borrowers most at risk as payment defaults loom

Mortgage borrowers most at risk as payment defaults loom
Brokers reckon those with Help To Buy and second charge mortgages, as well as those with over leveraged loans in high house price areas, could all be at risk [© Ian Hodgson/Bloomberg]

The City watchdog has said hundreds of thousands of mortgage borrowers are at risk of defaulting on their monthly payments, but which customers are most at risk and why?

Last week (January 11), the Treasury committee published a note from the Financial Conduct Authority which suggested “close to 200,000” households had fallen behind on payments by June last year, and a further 570,000 households are at risk of falling short on payments over the next two years.

FTAdviser asked brokers and property experts exactly which borrowers might be most at risk as fixed rate terms come to an end this year, with 1.4mn people set to refinance their homes.

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  • One said those who bought new build flats five years ago with Help To Buy loans “will be the first to be hit”. 
  • Another said those on second charge mortgages could be in trouble, with lenders stressing future rates and reportedly “causing havoc with affordability”.
  • A third said mortgages - particularly buy-to-let - in areas with high house values like the south east are “a time bomb”, with five-year terms set to renew from next year.
  • While a fourth said it will come down to the type of income debt-laden households rely on, and how secure it is.

This month (January 2023), the average two-year fixed rate was 5.79 per cent according to MoneyFacts. A year earlier, it was 2.38 per cent.

The FCA’s figures, which totalled 770,000 borrowers in arrears or at risk of falling into arrears, are based on interest rates which factor in the September 23, the day the "mini" Budget was announced which sent interest rates soaring.

'The Help to Buy scheme was always devised to prop up developers and construction sector first, occupiers were a delayed afterthought.' [© Simon Dawson/Bloomberg]

The regulator, having submitted the figures in mid-December, said they were “sensitive to changes in interest rates”. This could mean the number of borrowers at risk of defaulting on payments could now be higher or lower.

In September, the average two-year fixed rate was 4.24 per cent. In October, this figure climbed to 5.43 per cent. And in November, it peaked at 6.47 per cent. Since the, interest rates have been gradually trending down.

Inflation-linked HTB loans

Founder of DJF Asset Management, Dan Fatica, who specialises in short-term property finance, said the outlook is not as negative as “the doomsayers” say it is.

“Yes, there will be an affordability crunch, but I think it will be very unique niches of the market that are hurt,” Fatica continued.

“Those who bought new build flats five years ago with chunky Help To Buy loans will be the first to be hit.

“The interest rates on these mortgages are inflation linked. The scheme was always devised to prop up developers and construction sector first, occupiers were a delayed afterthought.”

Those with a Help To Buy government loan have to start paying interest in the sixth year of their loan term until they pay off the loan in full. 

'Some lenders may recommend borrowers sell their property, but this might not be the best option in the current market' [© Charlie Bibby/FT]

The interest rate starts at 1.75 per cent, but rises in April each year based on the rate of inflation at the time according to the consumer price index, plus 2 per cent.

Over the past year, inflation has peaked at 11 per cent, with it currently sitting at about 9 per cent.

This would mean for someone starting to pay interest this year, they will be paying more than double what they budgeted for when they initially took out the loan.