Mortgage defaults increasing faster than expected
The number of people missing payments on their mortgages has risen by more than anticipated during the past three months, the Bank of England has reported.
The central bank’s Credit Conditions Survey for the second quarter of 2008 reveals that mortgage lenders are seeing many households experiencing difficulty in meeting their repayments, resulting in a rise in defaults on loans. Although lenders largely expected this increase, the actual number of defaults has risen by more than they previously envisioned.
The survey, which canvases lenders for their views on the credit market, also paints a grim forecast for the future. Lenders predict more defaults lie on the horizon, and also expect further reductions in the number of loans made available to new and existing homeowners.
In the three months to mid-June, the amount of credit offered by lenders has reduced as falling house prices, as well as funding issues, caused banks and building societies to tighten their belts. The survey shows that further declines in the availability of home loans should be expected over the next three months.
The inaccessible mortgage market is bad news for house prices. Earlier this week, Nationwide reported that the pace of house price falls slowed in June, but at the same time warned people that this is not a sign that the housing market is stabilising.
Changes in house transaction levels are a good indication of the likely path for property prices, with a few months' delay until house purchase approvals feed through to slowing annual house prices.
With the number of house purchase approvals per month now at historic lows, and running at less than half of its long run average rate during May, the decelerated house price falls seen in June may not be long-lasting.
The impact of house price falls is unlikely to be as far reaching as some commentators have feared. According to mortgage lender GE Money Home Lending, a homeowner who bought in 2004 has an average equity cushion of 48% - meaning prices would need to fall by almost 50% before the value of their mortgage exceeded the property value.
London homeowners are even better placed, with those who bought in 1995 unlikely to experience negative equity unless house prices fell by 72%.
Gerry Bell, head of mortgage marketing at GE Money, says: “Over the past decade homeownership has delivered fantastic returns for many borrowers and we would need to see unprecedented falls in property prices for the average home owner to be severely impacted.
“Homeowners who purchased their property just four years ago for instance, even without a deposit, have an equity cushion of almost 50% before the value of their home loan would exceed the property value."
However, as the Bank of England’s Credit Survey shows, households across the UK – both affluent and cash-strapped – are being hit by the rising cost of food, fuel and house bills. As a result, many could be struggling to meet their loan repayments, increasing the likelihood that they may default in the future.
Research suggests that a £30 billion “mortgage migraine” is due to hit the UK in July, when thousands of fixed-rate and discounted deals come to an end.
With fewer mortgage deals available - and bigger price tags attached to those that are - many homeowners will be forced to sit on their lender’s punitive standard variable rate (SVR) while others will see their repayment costs increase dramatically.
For those who are already overstretched, the financial impact could be devastating.
Rising mortgage or rental costs have resulted in 20% of people in their forties using loans or credit cards to keep their heads above water, according to price comparison site moneysupermarket.com.
Tim Moss, head of loans and debt at moneysupermarket.com, says: "It's a very serious situation when you have people turning to a short-term solution to fund a long-term product.”
A report from the Joseph Rowntree Foundation estimates that a single person living in the UK today needs to earn at least £13,400 a year before tax in order to afford an acceptable standard of living, while a couple with two children would need to earn a collective £26,800 before tax.
This amount of income is needed to cover the cost of living, but not the cost of having a roof over your head, as mortgage and rent payments are not taken into account.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.