Homeowners in mortgage arrears increase by 25% in a year as interest rates rise

New data shows that the number of homeowners in mortgage arrears has increased by 25 percent in the past year.

The number of homeowners’ mortgages in arrears increased by 5,750 in the last three months of 2023 to a total of 93,680, which represents a 7 percent increase compared to the previous three months, according to UK Finance.

Meanwhile, the number of mortgages in arrears rose by 18 percent to 13,570 in the last three months of last year.

This means that mortgage arrears have risen by an alarming 124 percent year-on-year.

Mortgage arrears occur when people fall behind in repaying their mortgage.

An estimated 1.5 million homeowners and 230,000 homeowners with fixed-rate mortgages will expire this year.

Last year, a succession of base rate hikes and disappointing inflation figures saw the average two-year fixed mortgage rate peak at 6.86 percent in the summer, according to Moneyfacts, while the five-year fixed rate reached 6.37 percent.

Although average two-year fixed mortgage rates have fallen to 5.58 percent, while five-year mortgage rates are now 5.22 percent, they remain well above the 2 to 2.5 percent averages recorded before the interest rates skyrocketed in 2022.

Lewis Shaw, mortgage adviser at Shaw Financial Services, said: ‘It is worrying to see that mortgage arrears figures continue to rise, and unfortunately this is a direct result of higher mortgage rates, the cost of living crisis and years of stagnant wages. .’

Hannah Bashford, director at mortgage broker Model Financial Solutions, added: ‘These statistics will be a stark reminder of the financial stress homeowners and landlords continue to face.

‘There will always be a lag with this data as there has been the Mortgage Charter and people will have used their savings to continue making their repayments, but as those savings dry up or the end of the six months approaches, people who do who is having a hard time may fall into payment arrears.

‘We certainly haven’t seen the end of this yet and I fear there will be more to come.’

Seizure figures remain low

Mortgages in arrears currently account for 1.07 percent of all outstanding mortgages for homeowners, and 0.69 percent of all outstanding mortgages for purchase and rental.

Moreover, according to UK Finance, the number of repossessions remains very low.

A repossession occurs when a lender takes control of a property after a borrower has defaulted on their mortgage, usually to sell it. This is a last resort after other options have been explored.

A total of 1,040 homes were repossessed in the last three months of 2024 in both the buy-to-let and homeownership mortgage sectors.

This is down from the nearly 2,000 seizures recorded in the last three months of 2019 before the pandemic.

Scott Taylor Barr, principal advisor at Barnsdale Financial Management, says: “Context is critical when looking at statistics. After all, if one person is taken back in 2022 and two people in 2023, that is an increase of 100 percent.

‘According to the FCA figures for 2023, total UK mortgage debt is £1,654.3 billion. Finder mortgage statistics show that the average UK mortgage is £189,503.

‘That means the total number of mortgaged homes in Britain should be around 8.7 million homes.

‘So even with this increase, only 1.23 per cent of total UK mortgages are in arrears, and from a macroeconomic perspective that is a small amount.’

Ultimately, lenders’ stress tests have allowed borrowers to keep up with their mortgage payments, even when their interest rates are higher than the interest rates that were in place when they first took out their mortgage.

Although stress testing guidelines were reportedly relaxed in 2022, when the Bank of England dropped the requirement for lenders to undertake affordability stress tests.

Previously, this meant that borrowers had to prove that they could still afford their mortgage repayments if their mortgage interest rate rose to 3 percent above their lender’s standard variable rate.

Mortgages in arrears accounted for 1.07 percent of all outstanding mortgages for homeowners

Another element of the mortgage affordability guidelines that has been retained is the loan-to-income ratio.

This is a limit on the amount banks can lend based on the borrower’s annual income. They can offer some loans above this level, but there are strict limits on the number.

As a general rule of thumb, most people will have been limited to a maximum of 4.5 times their income when taking out their mortgage.