Britain’s beleaguered mortgage borrowers are likely to escape the scale of home repossessions suffered in previous economic crises because of higher levels of housing equity and regulatory pressure on lenders, say market experts.
With 1.4mn households set to roll off their fixed rate mortgages over the course of 2023 — most taken out two or five years ago at much lower rates than today’s — the pressure of meeting soaring repayments has combined with a cost of living crisis and a gloomier outlook on inflation.
But while borrowers face higher costs, the mortgage crunch has not yet translated into mass repossessions. Just 1,250 mortgaged properties were taken into possession in the first three months of this year, according to industry group UK Finance. This was 50 per cent up on the previous quarter, but compared with the numbers that lost their homes during the recession that began in 1990 — the historic peak of repossessions — it barely registers.
Between 1991 and 1993 some 188,600 homes were repossessed by lenders, according to UK Finance.
The reasons for this apparent difference lie in mortgage market trends, the history of house prices and hard-hitting regulatory reforms, market experts say. But they cautioned that there was plenty of room for uncertainty given the unpredictable economic outlook, particularly over jobs.
“I don’t think we should expect repossessions to rise to the extent we’ve seen during previous downturns,” said Neal Hudson, founder of housing market analysts BuiltPlace. “For lenders and regulators they should be the absolute last thing that they do. But that’s not to say we won’t see them go up. We will.”
A surge in repossessions would pile further pressure on Rishi Sunak, the prime minister, who has rejected calls for direct state support for mortgage holders, arguing that the fight against inflation was “the best and most important way that we can keep costs and interest rates down for people”.
The Bank of England’s official interest rate — currently at 4.5 per cent — was in double figures between 1988 and 1991. As a result, most borrowers at that time chose a variable-rate mortgage rather than fix at a high level. This meant, however, that base rate changes hit their monthly repayments more quickly.
Fixed rates are the norm today. While these will only protect from interest rate changes for as long as the fix lasts, they crucially provides borrowers with time to plan.
In the early 1990s, when house prices dropped and sent borrowers into “negative equity” — when the property is worth less than the outstanding balance on the mortgage — banks and building societies faced few regulatory responsibilities obliging them to offer temporary help or alternative mortgage options.
“There was no mortgage regulation [in the 1990s],” said Ray Boulger, analyst at mortgage broker John Charcol. “Lenders are now under the cosh from the Financial Conduct Authority to exercise forbearance, and to go through all possible processes with clients to come to some sort of tailored arrangement. I think that’s going to be crucial for a lot of people.”
In March, the FCA set out the measures it expected lenders to take to support struggling borrowers. Banks and building societies must offer existing customers a mortgage deal, even when they fail other lenders’ affordability tests; they must consider helping customers in difficulties cut their monthly payments through, for example, switching them from a repayment mortgage to an interest-only loan; or they should extend the term of their mortgage, another way of reducing repayments.
Some, but by no means all, lenders may offer a mortgage payment holiday. The government first unveiled a mortgage payment scheme for those affected by Covid-19 in March 2020, although such schemes have traditionally been used to help borrowers cope with short-term or unexpected changes in circumstances. But brokers warn most of these measures increase the total amount of interest payable over the life of the loan.
One banker said they were yet to see a material shift in the number of customers being unable to make mortgage repayments, but that they were well prepared. “It’s in no one’s interest that a house is foreclosed upon,” they added.
As well as regulation, another key difference between then and now is the cushioning effect of housing equity built up over years of house price growth. Research by estate agent Savills found the total value of all homes across the UK reached a record £8,679bn at the end of 2022, with outstanding mortgage debt standing at £1,660bn.
In the four years since 2019, the value of UK housing rose by almost a quarter, while outstanding mortgage debt went up by 11 per cent. “So, while outstanding borrowing increased by £168bn, the growth in the total equity pot was well over nine times that figure at £1.46tn,” said Lucian Cook, Savills residential research director.
For those with more equity in their property — with a loan-to-value ratio of 60 or 70 per cent — but who are unable to make their repayments, this means they will have more options — and more time — when agreeing a plan with banks.
Borrowers in this position are far from exceptional; last month, Lloyds Banking Group said its mortgage book carried an average loan-to-value of 42 per cent.
Another safety valve not present in previous crises is the “stress test”, where lenders assess whether a borrower can still afford a mortgage if the interest rate were to rise higher in future. However, with each bank applying different criteria and little follow-up on their initial assessment, it was unclear how much comfort policymakers could take from these tests, said Hudson.
He gave the example of a couple who take out a mortgage when they have two full-time incomes. If they later decide to have children, one partner may earn only part-time, while paying extra costs of childcare. “There will be some people in that situation thinking, ‘how the hell do we make it work now?’”
As stress rates have risen — typically to about 8 per cent, according to Adrian Anderson, director at broker Anderson Harris — lenders are also taking into account borrowers’ other financial commitments, such as car loans or school fees, which have risen with inflation.
“That has brought out a few surprises over the past three months,” Anderson said, noting that under previous ultra-low interest rates these extra payments would make little impact on a person’s capacity to borrow. “We’re now spending a lot more time checking affordability with different lenders.”
Hudson expected repossessions to rise — and said that further dangers lurked: “If the Bank of England has gone too far with raising interest rates and we start to see a real impact on the wider economy, with job losses, that might be a situation where we start to see more repossessions.”
Since the process is lengthy — a lender must exhaust alternative avenues with a borrower before beginning a potentially drawn-out court process — the current low levels may disguise what lies ahead. Any big rise in repossessions is unlikely to appear in the data before next year.
The final alternative to repossession is simply to sell up. While homeowners may resist this, waiting to be forced out of their home by legal process comes with big costs, damaging their credit rating and their ability to take out another mortgage.
For Hudson, the turbulence of the mortgage market and investors’ single-minded focus on the next data release could have its upside. If the inflation news is better than expected, “All of a sudden we could start to see rates come down. I just think we’re in a very volatile period.”
