Mortgage arrears increased by 13% during the first quarter of this year, reaching the highest levels since 2016, as per Bank of England figures that highlight the pressures within the UK mortgage market.
The rising interest rates and the soaring unemployment in the last few years have increased households’ disposable incomes, which has forced some families to reduce or even stop their monthly mortgage payments.
Mortgage holders who buy to let are also under stress in some parts of the United States, where renters are grappling to cope with the rising cost of living.
The Bank of England said mortgage arrears climbed to PS16.9bn, which is up 29% from last year’s figures and the highest since the 3rd quarter of 2016.
Mortgage arrears are calculated based on data that shows the percentage of borrowers who are unable to pay at minimum 1.5 percent of the outstanding mortgage balance or when the property is still in possession.
The mortgage lending market was also hit in the second quarter, with gross advances dropping in the second quarter by PS6.3bn up to PS52.4bn. Year over year, mortgage lending fell by almost a third to its lowest since the most severe Covid-19 crisis during the 2nd quarter of.
Lewis Shaw, founder of Shaw Financial Services, a company based in Mansfield Shaw Financial Services, told the news agency Newspage the “mortgage meltdown” is approaching until the Bank of England changes its strategy.
Shaw declared: “The speed at which mortgage arrears have been rising is alarming and should make us think twice before the next Bank of England interest rate meeting. This is alarming data and we’re aware that things are about to get a lot more dire with 1.6m homeowners scheduled to renew in the next twelve months at substantially more expensive rates than they have experienced for more than a decade.”
Simon Gammon, managing partner in the finance department of the estate agent Knight Frank, stated that the percentage of mortgage borrowers being behind on payments remained very low, at 1 percent, despite the “sizeable jump in arrears.”
He explained: “That’s because the vast majority of outstanding mortgages were issued under the post-global financial crisis regime, which was much more stringent when it comes to affordability.”
While homeowners were more likely to cut spending elsewhere prior to falling behind on mortgage payments, landlords who rent out their properties could have a different outlook, according to the report.
“We will more often witness arrears in the Buy-to-Let sector, which is where landlords are faced with particular challenges. If a landlord realizes that their mortgage is no longer reasonable or that the rent doesn’t meet their expenses, they have two options – either sell or declare default. If they decide to sell, they might be required to wait until the end of a year to allow the tenancy period to come to an end, or if they decide to sell a property with an existing tenancy, it is more challenging.
“Landlords are also more likely to opt to default than those struggling with a mortgage secured against their main residence, so this is an area to watch,” he said.
The new Bank of England vice-president, Sarah Breeden, said she agreed with her fellow members who are on the monetary policy committee (MPC), which decides the UK rate of interest, and that the inflation could slow down in the coming year than was anticipated, which could force banks to keep borrowing costs higher for longer than originally planned.
Breeden is set to succeed Jon Cunliffe as the Bank’s deputy governor for financial stability following the MPC’s meeting in the coming week. Breeden said that there was the possibility that unemployment and growth would increase.
“I will, after November, be very careful in balancing those two factors: the risk of inflation becoming embedded through more persistent, second-round effects, as well as the impact of tightening coming through,” she addressed the Parliament’s Treasury Committee in a hearing held to approve her appointment.
“The challenge right now is that wages are high and risingand there is a real risk that second-round effects means that this inflation becomes embedded,” she stated, adding that while keeping inflation under control, “it is not our intention to cause a recession.”
The MPC is expected to increase interest rates by one-quarter of a point to 5.5 percent on the 21st of September, increasing the cost of mortgage payment by 3000 dollars per year for households that refinance a two-year fixed product.
Breeden stated that she expects that inflation will rise to “around the [Bank of England’s] 2% target in two years’ time”.