News Analysis: Arrears reach 12-year high

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As mortgage arrears hit £2.05bn at the end of the first quarter (Q1) of 2022 — the highest level for 12 years — property professionals forecast the figure would rise even further this year.

Regulated and unregulated mortgage arrears reached the landmark total in March, the highest figure since June 2010 when arrears touched £2.09bn, according to data from the Bank of England and the Financial Conduct Authority.

The 12-year high comes as homeowners face a perfect storm of higher taxes and living costs that stem from post-pandemic supply chain woes, slower post-Brexit growth and the Russia-Ukraine war, all of which look set to play out this year and into 2023.

Food sales fell by 1.6% in the three months to May as “reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living”, said the Office for National Statistics (ONS) last week.

Energy bills jumped by 54% in April and are likely to increase by an even larger amount in October as price caps set by Ofgem are scheduled to rise for the second time in a year, bringing average annual domestic fuel bills to £3,500.

Also in April, National Insurance Contributions were lifted by 1.25% for both employees and employers, and council tax rises were introduced, which came on top of last year’s four-year freeze on income tax thresholds.

These increases will take the UK’s overall tax burden to 35% of gross national product by 2025–26 — the “highest level since Roy Jenkins was chancellor in the late 1960s”, according to the Office for Budget Responsibility.

All of this led inflation to edge up to 9.1% in the 12 months to May, with prices continuing to rise at their fastest rate in 40 years, driven by rocketing food and energy costs, according to the ONS.

The UK economy lifted by 0.8% in Q1 2022, but shrank by 0.1% in March and by 0.3% in April, says the ONS, as price rises began to take their toll.

Many economists forecast the UK economy will slip into a recession during the next 12 months.

“This combination of factors is leading to people having to choose which bill they will pay at the end of the month,” says Mazars tax advice partner Matthew Carter.

“Unpaid mortgage bills can build by two to four months before firms take more serious action. That can lead homeowners to put these bills as a lower priority, even though it is a bill that keeps the roof over their head.

“Pressure does funny things to people.”

Carter adds that the remortgage market will begin to look very different this year as borrowers look to secure new deals and those on standard variable rates search for more secure fixed-rate products in order to avoid arrears.

He says: “Rising interest rates will change the remortgage market. There will be fewer products to choose from, and they will be more complex and more expensive.”

Your Mortgage decisions director Dominik Lipnicki says interest rates had started to rise a few weeks after the Bank of England began a series of five base rate rises in a row (currently at 1.25%) from last December.

The average standard variable rate paid by roughly two million borrowers hit 4.91% at the start of June, the highest level in 13 years, according to Moneyfacts. This is up by 0.51% on last December and is the highest since February 2009.

“The rises we have seen have tended to increase at a far higher rate than the Bank rise, adds Lipnicki. “With inflation where it is, they can only go one way, and that’s up. So, while fixed rates will be higher, more people will of course want them to provide much-needed stability.

“We are seeing, and will continue to see, more borrowers wanting longer-term fixed rates of five, seven or even 10 years. I would not be surprised if longer-term fixed rates might at some point hit 4% or 5%.”

Vantage Finance managing director Lucy Barrett agrees that the market is already fast moving. She says that, if customers “are not ready to transact in days, or hours, the product could well be gone by the morning”.

Barrett adds: “We have quoted commercial products to clients where the fixed rate was 1% higher at the point of securing it just a couple of weeks later.

“There was a point where it seemed to be stabilising, but it was short lived and the climb goes on. Where clients with good deposits borrowing in the mainstream mortgage market would expect to see rates starting with a 1, it’s not inconceivable that 3 or 4 will look very good soon.”

Barrett suggests the best move for borrowers currently on standard variable rates may be to talk to a broker about their options rather than rush in to a fixed-rate deal.

She says. “This may not be the best decision and without a crystal ball it’s hard to say, but the time to fix was the end of last year or the beginning of this year, given the rapid changes in the market.

“The squeeze on the cost of living will create more anxiety among mortgage holders to have that peace of mind, but the question will be what price they are willing to pay for that.”

This year will be marked by millions of standard variable rate and remortgage borrowers piling in to a rising market, the experts say.


This article featured in the July edition of MS.

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