The Bank of England has published data for Q2 on Tuesday showing the value of outstanding balances with arrears (defined as the borrower failing to make contractual payments equivalent to at least 1.5% of the outstanding mortgage balance or where the property is in possession) increased by 13.0% on the quarter and 28.8% on a year earlier, to £16.9 billion. This was the highest seen since 2016 Q3.
It also revealed the proportion of total loan balances with arrears increased on the quarter from 0.89% to 1.02%, the highest since 2018 Q1 and that new arrears cases equated to 16.0% of the total outstanding balances with arrears in 2023 Q2, which was little changed compared to the previous quarter.
Brokers were concerned by the “bleak” data but said the worst is yet to come. According to Jamie Lennox, director at Norwich-based mortgage broker, Dimora Mortgages: “This data makes for bleak reading, especially given that much of the damage of 14 consecutive base rate increases has yet to filter through. The percentage of arrears in 12-18 months’ time when more people have come off their ultra-low rates could be dramatically higher. The Bank of England runs the real risk of overcooking the base rate increases with long-term damage to the housing market and the finances of millions.”
His views were shared by Lewis Shaw, founder of Mansfield-based Shaw Financial Services: “The speed at which mortgage arrears are increasing is terrifying and should give cause to pause at the next Bank of England interest rate meeting. This is dire data, and we know that it’s about to get an awful lot worse with 1.6m mortgage holders due to renew over the next twelve months at significantly higher rates than anyone has been used to for well over a decade. We’re still at the thin end of the wedge, so unless we have a change of direction from Andrew Bailey, we’re about to see a mortgage meltdown for thousands of households that will ripple through the property market for years to come. If this isn’t the canary in the coal mine, I don’t know what is.”
Graham Cox, founder of the Bristol-based broker, Self Employed Mortgage Hub, added that “Andrew Bailey and the Bank of England should hang their heads in shame. Having been too late and too slow in raising interest rates, they’ve had to raise them higher than necessary. They need to cut immediately, as it’s clear we’re heading for a sharp recession that will kick inflation into touch in short order”.
Darryl Dhoffer, founder of Bedford-based The Mortgage Expert, agreed: “So, the plans outlined by the Government and the Bank of England to draw down inflation are now having these tragic results in arrears. Just relying on Bank of England base rate rises will lead to further pain and misery, and will lead to a UK-wide recession on a scale that we have never seen before.”
Meanwhile, Riz Malik, director of Southend-on-Sea-based independent mortgage broker, R3 Mortgages, said the data will be a blow to the Government ahead of a General Election: “This horrendous and distressing data was always on the cards. The swift escalation in rates was bound to significantly impact default rates, and it’s likely the situation will deteriorate further. This is the kind of data the Government would prefer not to see approaching a General Election. Yet, given their minimal intervention, they have only themselves to blame.”
Imran Khan, co-founder of Canary Wharf-based lettings specialist, PropertyLoop, also said the worst is yet to come: “The surge in arrears is a stark indicator of the financial pinch many are facing. Homeowners and landlords alike are grappling with soaring interest rates and increased costs, feeling the bite in real time. Tenant arrears are climbing, especially in London, as the knock-on effect becomes palpable. We’ve not yet seen the full impact of rising interest rates: it typically takes eight to nine months for the economy to show the scars. With 350,000 people per quarter coming off fixed rates — most being buy-to-let landlords — this is a ticking time bomb. As rates potentially hit 6% or 7%, many will find themselves in an untenable position. The real test of our economic resilience will reveal itself in 2024. Expect to see a spike in repossessions and a deeper strain on the economy in the next 18 to 24 months.
Kundan Bhaduri, director of London-based property developer and portfolio landlord, The Kushman Group, said simply: “While interest rates remained historically low for well over a decade, a sharp increase in the base rate has had a significant impact on mortgage payments for a growing number of borrowers. Those with variable rate mortgages have found that they have no other choice but to sell up.”
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