Sharp rise in missed mortgage payments
Mortgage lenders are bracing themselves for a near 100% jump in the number of borrowers missing repayments this year, but are hopeful that low interest rates and additional supportive measures will keep the number of repossessions in check.
Last year saw 182,600 borrowers fall behind with their repayments, but this is expected to jump to 360,000 by the end of 2009 – equal to to 3.2% of all mortgages. The Council of Mortgage Lenders (CML), which represents banks and building societies offering mortgages, also warns that around 425,000 borrowers will be more than three months in arrears by the end of the current year.
However, these figures are lower than previously anticipated mainly as a result of low interest rates and government initiatives to prevent borrowers from falling behind on their loan repayments.
Despite the sharp rise in the number of arrears, the CML is hopeful that the all-time low Bank of England base rate will see 10,000 fewer homeowners that previously expected lose their homes to repossession. It previously forecast that 2009 would see 75,000 properties repossessed, up from 40,000 in 2008 and 25,900 in 2007.
However, it has now downgraded this forecast to 65,000 taking into account measures by the government and lenders to help struggling homeowners stay in their properties.
The number of people forced out of their homes because they failed to meet their mortgage repayments jumped to 12,800 during the first three months of 2009. Repossessions occur when a bank or building society takes possession of a property because the owner has failed to pay the mortgage.
The CML says lower mortgage rates mean that struggling borrowers will build up arrears more slowly, thus giving lenders greater opportunity to help those experiencing a temporary fall in income. More people are also now making contact with their lender at the first signs of trouble.
In its latest housing market commentary, the CML warns: “We expect that further job losses and disruption to incomes will cause the number falling behind with their mortgage payments to rise over the course of 2009 - but at a slower pace than we had previously anticipated.
“Large cuts in interest rates have benefited many, making it easier for households who suffer a loss of income to continue to pay their bills. As a result, we expect fewer borrowers to fall behind in their mortgages payments this year than previously and fewer possessions. But the deteriorating labour market means that the number in arrears will still rise.”
Despite the CML revising its repossession and arrears forecasts downwards, it is cautious against calling a housing market recovery. The positive news seen in recent months – such as rising buyer interest, increasing mortgage approvals and slight house price rises - may not indicate the start of a “robust recovery”, it warns.
Despite the CML lowering its expectations of repossessions, housing charity Shelter says lenders and consumers should not be "complacent" as both repossessions and arrears are likely to soar once the Bank of England base rate starts to increase.
The base rate has fallen from 5% last October to just 0.5% today. Experts are divided as to how long the base rate will remain at this all-time low, with many predicting an increase before the year is out.
While rate rises are likely to be moderate at first, if the UK enters a period of high inflation - where prices rise quite rapidly - then the central bank might be forced to increase the base rate sharply.
"With arrears escalating at an alarming rate, unemployment at its worst for 12 years and interest rates very likely to rise next year, we believe a second, more devastating wave of repossessions could occur within the next two years," explains Sam Younger, chief executive of Shelter.
"It is still a fact that every single day there are hundreds of hard working people losing their homes, and with thousands upon thousands drowning in arrears there is no question we are storing up huge problems for the future."
The charity has seen a 250% increase in the number of people calling its free mortgage arrears helpline (0300 3300 515) over the past year. Of these, around 85% fear they are at risk of losing their homes to repossession.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.