Mortgage arrears reached a seven-year peak in the last quarter of 2023, highlighting the strain of elevated borrowing costs on households, according to official data.
The Bank of England reported that the ratio of total loan balances in arrears, relative to outstanding mortgage balances, climbed to 1.23% in the three months ending December 31, up from 1.12% in the previous quarter. This marks a departure from the long-term decline in overdue payments, reaching the highest level since the final quarter of 2016.
The surge in mortgage costs over the past three years, driven by the BoE's efforts to curb inflation by raising interest rates to a 16-year peak of 5.25%, has contributed to the trend of rising home loan arrears.
However, the current share of mortgages in arrears remains notably lower than the peak of 3.64% observed in the first quarter of 2009 during the global financial crisis.
Karen Noye, a mortgage expert at Quilter, commented on the significant rise in mortgage rates, stating that it has become challenging for some borrowers to keep up with their increased payments, leading them into arrears.
Financial markets anticipate the BoE to commence interest rate cuts from this summer, projecting a decrease in the benchmark rate to 4.5% by the year's end.
As interest rate expectations have shifted, lenders have begun offering cheaper deals. However, households continue to face higher mortgage payments as their fixed contracts expire.
While the proportion of loan balances in arrears remains relatively low at 1.23%, the pace at which it is increasing is a cause for concern among policymakers, according to Simon Gammon, managing partner at Knight Frank Finance.
Despite the rise in mortgage arrears, they are lower compared to the 2008-2009 financial crisis, partly due to a robust labor market and enhanced mortgage regulations.
Recent research from the BoE revealed that the majority of borrowers who reached the end of fixed deals in 2023 were offered rates lower than those initially agreed upon. Additionally, data from the BoE indicated a decline in the share of gross mortgage advances for buy-to-let purposes, dropping by 4.9% points year-on-year in the final quarter to 7 percent, the lowest since 2010. Noye attributed this decline to various changes in the buy-to-let tax landscape in recent years, making it a less appealing option for landlords.
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