Data from UK Finance found that, in Q3, there was a 3% fall in the number of arrears to 106,630 cases, more than the cumulative increase in numbers seen so far in 2024.
Borrowers’ resilience when keeping up with mortgage payments was attributed to low unemployment, responsible lending rules ensuring payments were affordable, and the support offered by lenders.
UK Finance predicted that arrears would continue to fall in Q4 but noted some borrowers would still be worried about making their mortgage payments.
It said with a modest rise in unemployment expected for this and next year as well as inflation coming back to target, wage growth would ease the pressure on household finances and lead to a reduction in arrears.
Older mortgage accounts struggling with higher costs
Although arrears were falling overall, UK Finance said there was not much improvement among borrowers already in arrears.
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It found cases where borrowers were still unable to manage mortgage payments, causing their arrears to worsen, despite “extensive” lender forbearance.
UK Finance said responsible lending rules had protected almost all recent borrowers from arrears, and the majority came from mortgages taken out over 10 years ago.
It found that more than half of the accounts in arrears were from homeowner mortgages taken out between 2005 and 2008, before the global financial crisis (GFC).
The trade body said some of these will have been in arrears for a while, while others were just about managing when interest rates were low.
Its data showed that when interest rates started to rise in late 2021, there was a “rapid increase” in pre-GFC mortgages falling into arrears.
Even as arrears have improved, this cohort of mortgages was still accounting for a rise in borrowers falling behind on payments.
As well as people falling into arrears, higher rates have meant the arrears balance is rising at a faster rate. The typical value of arrears for pre-GFC accounted increased from just under £13,000 in December 2019 to more than £34,000 by the middle of this year. These arrears represented 29% of the total mortgage balance.
UK Finance said lender forbearance was proven to help borrowers, but in a small number of cases, there was “no realistic prospect of the customer repaying the arrears”.
Additionally, a larger share of these pre-GFC mortgages are on an interest-only basis, so borrowers may not benefit from a growth in equity.
Possessions continue to climb
There were 1,700 mortgage possessions in Q3, and while this was flat on the previous quarter, it was 52% higher than last year.
UK Finance said this was primarily due to possession activity resuming after being suppressed during the pandemic.
The number of possessions was still “incredibly low by historic[al] standards” and the majority relate to older mortgages that have been in arrears for some time.
The flow of new cases was also declining, suggesting there would be fewer people falling into serious shortfalls and ultimately possession.
However, UK Finance said although the overall number of arrears would drop, possessions would be driven by less resilient, older mortgage accounts.
Mortgage affordability improves but is still constrained
UK Finance said demand for mortgages seemed to be coming from people who could have borrowed in a higher rate environment but decided to wait, rather than people who were unable to access finance.
It found there was a decline in the proportion of borrowers stretching themselves financially, aligning with the path of lower interest rates.
However, affordability was still “tighter” than it has been for more than 10 years, mostly due to higher house prices.
Although interest rates have fallen, UK Finance said borrowers were still preferring to choose a product transfer over a remortgage, with the share of this activity remaining above 80%.
The easing of rates and affordability pressures could see more borrowers externally remortgage next year, but UK Finance said product transfers would continue to take a higher share of refinance activity for the time being.
Consumers saving more
UK Finance found that as pressures of the cost-of-living crisis eased, households were able to save more money, even as the Bank of England cut the base rate.
In Q3, household savings rose due mainly to deposits in notice accounts. A total of £268.4bn is being held by high street banks in notice accounts, 8.5% more than last year.
Eric Leenders, managing director of personal finance at UK Finance, said: “We are seeing more signs that the cost-of-living pressures bearing down on households are beginning to ease, with mortgage lending and savings both increasing during the quarter. Notice accounts have proved popular for those households able to save more of their money.
“Although the challenges facing households are far from over, the picture that’s emerging from our data is one of gradual improvement. We know this will not be the case for all households, though, and I’d encourage anyone who might be struggling to reach out to their lender for support.”
This article is based on one that was first published on YourMoney.com‘s sister site, Mortgage Solutions. Read: Mortgage lending sees consistent growth with 15% yearly uplift in Q3 – UK Finance
