UK mortgage arrears reach seven-year high amid rising borrowing costs

And the pressure may not come off any time soon

UK mortgage arrears reach seven-year high amid rising borrowing costs

In the last quarter of 2023, UK mortgage arrears surged to a seven-year peak, according to official data that underscores the strain of elevated borrowing costs on households.

The Bank of England reported today that the proportion of mortgage balances in arrears climbed to 1.23% by December 31, up from 1.12% in the preceding quarter. This marks the highest level since the end of 2016 when the rate was at 1.24%.

This increase reverses a long-standing trend of decreasing overdue payments, driven by significant hikes in mortgage rates over the past three years. The Bank of England has raised interest rates to a 16-year high of 5.25% to combat inflation. Despite the recent rise, the arrears rate remains significantly lower than the 3.64% peak during the global financial crisis in the first quarter of 2009.

Although financial markets have been anticipating that the Bank of England will begin reducing interest rates this summer, potentially lowering the benchmark rate to 4.5% by year-end, the latest ONS data may keep pressure on the BoE to hold steady on rates. The rate drop expectation had led lenders to offer more competitive deals, although many households still face increased payments as their fixed-rate contracts expire.

“The BoE will be incredibly cautious to cut rates at a period when spending power is high for consumers and potentially triggering a fresh inflationary bout. As such, today’s data will continue to put a dampener on a rate cut in June or August, with November remaining the likeliest date to see that first fall,” Richard Carter, head of fixed interest research at Quilter Cheviot told IFA magazine.

As of February, the average two-year mortgage rate for a 60% loan-to-value ratio stood at 4.62%, down from a peak of 6.22% last July but still significantly higher than the 1.29% average in 2020 and 2021 when rates were at 0.1%.

The current level of home loan arrears remains below the levels seen during the 2008-09 financial crisis, thanks in part to a strong labor market and better mortgage regulations. Recent research by the Bank of England highlighted that most borrowers whose fixed deals ended in 2023 were offered rates below those for which they were initially tested.

The data also revealed a decline in buy-to-let mortgage advances, which dropped by 4.9 percentage points year-on-year to 7% in the final quarter, the lowest since 2010. Pundits have attributed this to multiple changes in the buy-to-let tax landscape, making it less appealing for landlords. Upcoming changes to holiday let rules could exacerbate the situation further.