There’s a crisis brewing in the mortgage market — but we have a chance to prevent it
We know that people struggling with mortgages often don’t ask for support which could help. That’s why lenders need to take the first step.
These days a week is a long time in the economy. The last few weeks has seen the UK move, seemingly overnight, from a low interest rate economy to one where borrowing is much more expensive. This has had an immediate impact in the mortgage market where rates for fixed term mortgages have increased to their highest levels in 14 years.
As people come off their fixed term mortgages they will need to find extra cash every month. Those on variable mortgages will already have seen costs rise. This would be difficult for many at any time, but in the middle of a cost-of-living crisis many households have no room for manoeuvre.
As our debt advisers know, mortgage holders aren’t immune to financial struggle. Last year we gave detailed debt advice to almost 5,000 mortgage holders, up from 3,400 in 2019. In that same period, the proportion of mortgage-holding debt clients who live in a negative budget — with more going out each month than coming in — rose from 35% to 45%. As of September of this year, it’s 49%.
Looking at the population as a whole, we have found that over 1 in 4 mortgage holders couldn’t afford to see mortgage payments rise by £100 a month and almost half (45%) would be unable to afford an increase of £250 a month.
The risk of spiralling debt
When people can’t afford their mortgage, one of three things happen. They can miss mortgage payments and go into arrears. They can cut back on essential spending on items like food and energy. Or they can go use credit to fill the gap, and go deeper into debt.
Of these three, it’s the first where people are best protected. Mortgage lenders have to consider how to help people in financial difficulties through measures like restructuring payments, providing payment deferrals and removing additional fees and charges. But the worry is that people are not receiving this support and instead going without essentials or going deeper into debt.
In 2020 the Financial Conduct Authority (FCA) looked at how mortgage holders behave when in financial difficulties. It found that people with mortgages “tend to protect their mortgage on the way into distress”. Instead of seeking out support, they take on substantial amounts of additional debt, including high-cost credit. In fact, the FCA found that of all groups it studied, mortgage holders in financial difficulty racked up the most additional debt.
We’re already seeing evidence of people struggling — our national polling found that 1 in 7 mortgage holders have already cut back on essentials and 1 in 10 have turned to high cost credit to make ends meet. For mortgage holders in a negative budget and already unable to afford their mortgage, those rose to 1 in 4 cutting back and almost 1 in 5 using high cost credit.
What we’re not seeing should speak volumes
The FCA and Bank of England monitor how many mortgages are in arrears. According to their data we’re currently seeing the lowest levels of mortgage arrears in over 15 years. In the second quarter of this year, less than 1.2% of all mortgages had missing payments.
However, polling we conducted in August found that 11% of mortgage holders didn’t have enough money to cover their mortgage and all their essential bills. That’s a lot more than 1.2%. We wouldn’t expect these numbers to be identical, but it shows that low arrears rates can mask the reality of significant numbers of people struggling to make ends meet and, in many cases, using other forms of credit to plug the gap.
Low arrears rates are usually seen as a good thing, a sign that people are managing their debts. But during a cost-of-living crisis the opposite is true: low arrears rates should be seen as a warning sign. It’s a sign that people are not asking for help. A sign of deeping debt or people going without.
Lenders have to take a leading role in ensuring people get the help they need
The FCA has rightly continued to remind lenders of their responsibilities to provide support to people in financial difficulties. But there remains too much expectation on people to approach their lenders for help when we know that many fly under the radar, looking to protect their mortgage payments and so may be reluctant to turn to lenders for help.
If borrowers are coming up to the end of their fixed term and haven’t got something new in place, lenders — not borrowers — should be taking the first steps to get in touch, understand their situation and work out how to ensure their mortgage payments are affordable. These are not normal times and so the FCA should be looking for lenders to go above and beyond to make sure that borrowers are protected from the shift to higher mortgage rates.
There are two rays of hope. Government, regulators and lenders all know what’s coming so they can prepare. And we know enough about consumer behaviour to know that leaving it to borrowers to take the first step is a mistake we can avoid. We need a clear plan for protecting people from crash landing into a new economy. There’s no excuse for getting this wrong.
This article was co-written with Rachel Beddow.
The nationally representative statistics in this blog come from polling conducted by ICM for Citizens Advice. The fieldwork was conducted between 27 May to 20 June 2022 and is based on a weighted sample of 1,031 adults who own their house with a mortgage or loan.
