There is a significant amount of talk surrounding the crisis of mortgages, its impact on borrowers and landlords, and the demand for government and regulatory intervention to alleviate the situation.
We want to emphasize that we fully acknowledge the genuine concerns and anxieties of many borrowers regarding their ability to meet their mortgage repayments at the current rates and the available options for remortgaging in the upcoming months. However, it is crucial to examine the data objectively to gain a contextual and balanced perspective.
The proportion of individuals who knowingly exceeded their financial capacity when obtaining their loans is relatively small and decreasing. Mortgage regulations have been in place since 2004, and even stricter rules were implemented in April 2014. These regulations mandate lenders to conduct thorough affordability assessments for all loan applications, subjecting them to stress tests to ensure borrowers can handle potential interest rate increases.
While there might be a few borrowers who secured loans before 2014 and are currently facing repayment challenges, they should be in the minority. Many borrowers with loans predating 2014 or even 2004 may have already repaid a significant portion of their total loan amount. Consequently, although they may be paying higher interest rates now, it is applied to a smaller principal.
In situations where borrowers encounter difficulties, it is of utmost importance for them to communicate with their lender and discuss available options. It’s important to note that not all borrowers will experience the same level of financial strain. Some may be comparatively shielded from interest rate shocks if their earnings have increased since obtaining the loan, and they may have made substantial repayments. On the other hand, others might have been impacted by illness, job loss, or relationship breakdown – sometimes all three – and they will require advice and assistance.
Mortgage regulations already mandate lenders to implement various “forbearance” measures to assist borrowers facing financial difficulties. Effective and detailed communication between lenders and borrowers is essential since each individual’s circumstances differ, requiring tailored solutions. This approach proves more targeted, resource-efficient, and preferable to establishing a government-imposed mortgage protection fund.
Recent data on arrears and property possessions in the first quarter have garnered attention. Arrears rates have risen by two percent compared to the previous quarter, which is unsurprising given the notable increase in interest rates. While we can anticipate arrears to continue rising in the immediate future, the overall figures are not a significant cause for concern. Lenders have several options to discuss with borrowers to tide them over during this period.
Property possessions have also increased by 50 percent since the previous quarter, but it’s crucial to maintain perspective. During the Covid-19 lockdown, there was a moratorium on lenders pursuing possession proceedings. Once the moratorium was lifted, courts faced a backlog of pre-lockdown cases, leading to an apparent surge in property possessions. However, we expect the possession data to normalize as the courts catch up with the backlog.
Although possession rates seem to be rising rapidly, they are starting from a very low base. In Q1 of this year, only 750 properties were taken into possession, representing a mere 0.03 percent of all mortgaged properties. In comparison, during 2009 following the 2008 credit crunch, 46,000 properties were taken into possession, accounting for 0.47 percent of all mortgaged properties.
Borrowers are undoubtedly feeling the financial strain, with some experiencing more significant difficulties than others. We have transitioned from a prolonged period of extremely low interest rates, and it will take time for the market to stabilize into a “new normal.” For those in greatest need, viable options are available.
Expert guidance from intermediaries plays a crucial role, and lenders can offer diverse solutions tailored to individual circumstances. As an industry, we must avoid fueling sensational headlines and impulsive reactions, focusing instead on delivering practical assistance where it is most needed.
* Kate Davies is executive director of the Intermediary Mortgage Lenders Association *