Alarm Bells Ring as mortgage arrears shoot upwards

The Bank of England says there was £18.8 billion of mortgage borrowing in arrears in the third quarter of this year.

That’s up 11.4 per cent in the quarter and 44 per cent in a year.

The proportion of total loan balances with arrears, relative to all mortgage balances, rose to 1.14 per cent - its highest since the middle of 2017.

Some 15.8 per cent of total outstanding balances were in arrears – 5.1 per cent higher than a year earlier.

Meanwhile £51.5 billion of new mortgages were approved for the coming months - down 16.5 per cent in a quarter, and 41.4 per cent in a year.

Sarah Coles, head of personal finance at business consultancy Hargreaves Lansdown, says: “Arrears have reared their ugly heads, with total mortgage arrears up over 10 per cent in a quarter and rising by almost half in a year. As a proportion of the total amount lent in mortgages, it hasn’t been this high since the middle of 2017.

“It’s hitting people with bigger mortgages harder, because while the total amount in arrears is soaring, the total number of borrowers was up less dramatically over the year – and actually fell over the quarter. It reflects how those who stretched their finances to get onto the property ladder, or trade up, are paying a horrible price for it now as their mortgage deals come to an end.”

And Coles warns that the pain is far from over. 

She continues: “Given the predominance of fixed rates in the market, the squeeze on our finances caused by sharply higher rates isn’t going to come as a short, sharp shock, but as a nasty squeeze on a small section of the mortgage market each month, over a horribly prolonged period of time.

“With so many people moving from a fixed rate of less than two per cent to around six per cent it’s no surprise that so many are hitting a brick wall financially.”

New mortgage borrowing during the autumn bounced back a bit from the summer, as mortgage rates gradually fell during the period. Borrowing was still way lower than a year ago, but not quite as dire as the summer – when mortgage rates hit a peak.

Unfortunately, mortgage approvals for the coming months told a less upbeat story, as they fell again during the quarter – reflecting slow sales seen this winter.

Coles says: “Higher rates are likely to continue to take a toll on buyer enthusiasm. UK Finance forecast that next year we’ll see mortgage lending for purchases down eight per cent from 2023. 

“It would mean the sluggish property market is here to stay, which would bring more pain for sellers whose properties have been stuck on the market for months. Whether this pushes prices much lower will depend on how sellers react. If they take their homes off the market, a shortage of available property could put a floor under prices. 

“However, the Office for Budget Responsibility isn’t convinced this will keep prices from dropping – it’s expecting them to fall 4.7 per cent in 2024.”