A business process company is warning the mortgage market to brace itself for increased arrears as a result of council tax reorganisation.

Target Group claims that plans set out by Deputy Prime Minister Angela Rayner – triggering what she calls a “progressive” redistribution of local council funding – could lead to council tax rises of over 25% in parts of London and the south east of England. 

The government’s Fairer Funding Review, led by Rayner, aims to redirect financial resources to areas perceived as having greater needs, primarily in northern England. 

Target group says this could slash government grants for wealthier councils, with eight London boroughs – including Camden, Hammersmith & Fulham, and Wandsworth —facing significant shortfalls.

One council has said it faced a £30.1m shortfall in 2028-29 highlighting that a 1% increase in council tax would raise £1.1m – meaning, claims Target group, that it would have to raise taxes by 27.4 per cent to cover the cost.

While under current legislation, council tax can only be raised by 5 per cent without a local referendum, every year the government gives special permission to a number of authorities to increase it further without consulting residents.

A spokesperson for Target says: “It’s early days but if these reforms proceed as planned, some boroughs could lose more than 70% of their current government grant.  Lenders should be deeply concerned the government’s proposals could leave local authorities in the position of having to ramp up council taxes by more than a quarter.  

“Borrowers in those local authorities won’t have budgeted for this. And this could well be the thin end of the wedge. If councils across the south east and south west of the country start having to put up council tax by more than 25 per cent, borrowers in those areas are going to find themselves very stretched.”

Target group is calling on lenders to ensure their collections teams are in good enough shape to be able to handle a potential surge in arrears.  

The spokesperson continues: “Lenders need to focus on using data intelligently to identify borrowers who may be starting to struggle and early engagement with people who have started to slip into arrears.  The cost-of-living crisis is far from over and the support lenders offer will need to be targeted and timely.  

“Lenders will need the right systems in place to manage processes proactively.  Early contact and remediation are key to keeping repossession a last resort and achieving better outcomes for borrowers and lenders alike. That requires investment in systems.”