More than 750,000 borrowers at risk of missing mortgage payments
The Financial Conduct Authority (FCA) said, in a letter sent to the Treasury Committee, that the 200,000 mortgages that were already in payment shortfall made up 2.4% of all regulated residential mortgages.
The watchdog estimated that more people would fall behind on their payments over the next two years but said this estimation was sensitive to changes in interest rates and real incomes.
Nikhil Rathi, chief executive of the FCA, said the regulator assumed people would see a 10% drop in their real incomes over the next two years.
He added: “Some households will experience a greater fall in real income (perhaps because of job loss), and others may experience much smaller reductions (or increases).”
Rathi said the FCA’s definition of a borrower being in shortfall meant they were spending more than 30% of their gross household income on mortgage payments.
He added: “This does not necessarily mean that those at risk will miss a mortgage payment because some people will be able to reduce their spending or make use of savings to help them meet their mortgage commitments.”
Millions face higher mortgage rates
This warning follows an update from the Office for National Statistics (ONS) which said 1.4 million borrowers would be facing higher mortgage rates and costs when refinancing this year.
The ONS said, according to the Bank of England, the effective interest rate on outstanding mortgages was 2.08% in November last year. Meanwhile, the average interest rate on a variable mortgage at the time was 4.41% and quoted household interest rates on new fixed mortgages were around 6%.
Defaults are a ‘worry’ for the nation
Karen Noye, mortgage expert at wealth management group Quilter, noted that the news of over three-quarters of a million people potentially defaulting on their mortgage would come as a “worry”, not only to Britain’s housing market but the nation as a whole.
She said: “While lenders are duty-bound to help their customers who are falling behind on payments, at some point, if payments can’t be paid, repossessions will eventually take place.
“Considering a repossession is disastrous for someone, lenders typically want to avoid this process, it is also costly for them as trying to recoup money from a sale has its own costs attached and can prove lengthy. If lots of repossessions take place at the same time, this will mean a slew of properties come to market, driving up supply while demand lags, and this will push down house prices.”
However, she added a few notes of optimism, stating that both mortgage rates and inflation were likely to drop in 2023.
In addition, Noye offered three tips for those struggling with their mortgage bills.
Three tips if you are at risk of default
1. Don’t bury your head in the sand
Lenders will normally write to you within 15 days of a missed payment but if you are struggling with your bill, it is crucial that you talk to your lender before they contact you. Burying your head in the sand will only make things worse. Mortgage debt is what is described as a priority debt and as the name implies should be prioritised above most other types of debt you have.
2. Work out what you can afford to pay back
Before picking up the phone to your lender, take some time to work out exactly how much you can afford to pay back each month. There are budgeting tools available online or you could speak to a debt charity or Citizens Advice. If you have sought help, do let your lender know as showing that you have looked at ways of paying back your debt shows you’re serious about it, and can help avoid repossession orders down the line.
3. Discuss ways of making payments
Lenders have a duty to act fairly with customers who are having difficulties. Having a frank conversation with your lender can help them find a way for you to avoid the problem spiralling out of control. Lenders might be able to put you on a payment plan based on what you can afford to pay back. This could mean providing options to extend your mortgage term, or if your home is worth more than the mortgage, you might be given the option of adding your arrears to the total amount you owe and pay it back over the lifetime of the mortgage.
We recommend that you seek advice from a qualified mortgage professional before opting for any plan, as some plans may end up with you paying much more interest over the lifetime of your mortgage.