Struggling UK mortgage borrowers are likely to escape the scale of home foreclosures suffered in previous economic crises due to higher levels of home equity and regulatory pressure on lenders, experts from the market.
With 1.4 million households set to pay off their fixed-rate mortgages over the course of 2023 – most were taken out two or five years ago at rates well below today – the pressure to make facing skyrocketing refunds combined with a cost of living crisis and a grimmer picture. inflation outlook.
But while borrowers face higher costs, the mortgage crisis has yet to translate into massive foreclosures. According to industry group UK Finance, just 1,250 mortgaged properties were taken up in the first three months of this year. That was 50% more than the previous quarter, but compared to the number of people who lost their homes during the recession that began in 1990 – the historic peak in foreclosures – it barely registers.
Between 1991 and 1993, some 188,600 homes were repossessed by lenders, according to UK Finance.
The reasons for this apparent difference lie in mortgage market trends, the history of house prices and impactful regulatory reforms, according to market experts. But they warned there was plenty of room for uncertainty given the unpredictable economic outlook, particularly with regard to employment.
“I don’t think we should expect repossessions to increase to the extent we’ve seen in previous downturns,” said Neal Hudson, founder of housing market analysts BuiltPlace. “For lenders and regulators, they should be the last thing they do. But that doesn’t mean we won’t see them increase. We will.”
A rise in foreclosures would put additional pressure on Rishi Sunak, the prime minister, who has rejected calls for direct state support for mortgage holders, arguing that fighting inflation was “the best and the most important means of maintaining costs and interest rates”. down for the people”.
The official Bank of England interest rate – currently 4.5% – was in the double digits between 1988 and 1991. As a result, most borrowers at the time chose a variable rate mortgage rather than fixed at a high level. This, however, meant that base rate changes affected their monthly repayments more quickly.
Fixed rates are the norm today. Although these only protect against changes in interest rates for the duration of the correction, they offer borrowers time to plan.
In the early 1990s, when house prices plummeted and sent borrowers into “negative equity” – when the property was worth less than the outstanding mortgage balance – banks and building societies were face few regulatory responsibilities requiring them to offer temporary relief or alternative mortgage options.
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“There were no mortgage regulations [in the 1990s]said Ray Boulger, analyst at mortgage broker John Charcol. “Lenders are now under the responsibility of the Financial Conduct Authority to forbear and go through all possible processes with customers to reach some sort of bespoke arrangement. I think that’s going to be crucial for a lot of people.
In March, the FCA set out the measures it expected lenders to support struggling borrowers. Banks and building societies must offer existing customers a mortgage deal, even when they fail other lenders’ affordability tests; they should consider helping struggling customers reduce their monthly payments, such as switching them from a repayment mortgage to an interest-only loan; or they should extend the term of their mortgage, another way to reduce repayments.
Some, but not all, lenders may offer a mortgage payment holiday. The government first unveiled a mortgage payment scheme for those affected by Covid-19 in March 2020, although such schemes have traditionally been used to help borrowers cope with short-term changes in circumstances or unexpected. But brokers warn that most of these measures increase the total amount of interest payable over the life of the loan.
A banker said he had yet to see a significant change in the number of customers unable to repay their mortgages, but was well prepared. “It is in no one’s interest for a house to be foreclosed,” they added.
Besides regulation, another key difference between then and now is the dampening effect of home equity built up over years of house price growth. Research by estate agent Savills found the total value of all homes across the UK hit a record £8.679 billion at the end of 2022, with outstanding mortgage debt of £1,660 billion pounds.
In the four years since 2019, UK house values have risen by almost a quarter, while outstanding mortgage debt has increased by 11%. “So while debt outstanding grew by £168bn, the growth in the total equity pot was well over nine times that figure to £1.46bn,” said Lucian Cook. , director of residential research at Savills.
For those who have more equity in their property – with a loan to value ratio of 60 or 70% – but are unable to make their repayments, this means they will have more options – and more of time – when they agree on a plan with banks.
Borrowers in this position are far from exceptional; last month, Lloyds Banking Group said its mortgage portfolio had an average loan-to-value ratio of 42%.
Another safety valve absent from previous crises is the “stress test,” where lenders assess whether a borrower can still afford a mortgage if the interest rate were to rise in the future. However, with each bank applying different criteria and little follow-up to their initial assessment, it was unclear how much policymakers could learn from these tests, Hudson said.
He gave the example of a couple taking out a mortgage with two full-time earners. If they later decide to have children, one of the partners may only earn part-time, while paying additional childcare costs. “There will be people in this situation who will think, ‘how the hell can we make it work now?'”
As stress rates have risen — typically to around 8%, according to Adrian Anderson, director of brokerage Anderson Harris — lenders are also taking into account borrowers’ other financial commitments, such as car loans or college tuition, which have increased with inflation.
“It’s brought a few surprises over the past three months,” Anderson said, noting that under previous ultra-low interest rates, these extra payments would have little impact on a person’s ability to borrow. “We now spend a lot more time checking affordability with different lenders.”
Hudson expected repossessions to increase – and said other dangers lurked: ‘If the Bank of England has gone too far in raising interest rates and we start to see a real impact on the broader economy, with job losses, this could be a situation where we start to see more foreclosures.
Given that the process is long – a lender must exhaust other avenues with a borrower before initiating potentially lengthy legal proceedings – current low levels may mask what lies ahead. A sharp rise in seizures is unlikely to show up in the data until next year.
The final alternative to repossession is to simply sell. Although homeowners may resist it, waiting to be evicted from their homes through legal proceedings carries significant costs, which hurts their credit rating and their ability to take out another mortgage.
For Hudson, the turmoil in the mortgage market and investors’ stubborn focus on the next data release could have upsides. If the inflation news is better than expected, “All of a sudden, we might start to see rates come down. I just think we’re in a very volatile time.