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"The speed at which mortgage arrears are increasing is terrifying"

ended 12. September 2023

The Bank of England has this morning published data for Q2 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.”

Graham Taylor, managing director of Nailsworth-based independent mortgage broker, Hudson Rose, added: "There is no way to spin this, it does not make pleasant reading. The fear has always been that the Bank of England has moved the rate too high and too fast and many more families will likely be affected as they come off their historically low fixed rates."

But Scott West, director of London-based Propertyze Consulting was less concerned: "The loan balances with arrears of 1.02%, whilst increased, is not an alarming figure when looking historically. In 2009 this number was around 3.4%."

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11 responses from the Newspage community

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Riz Malik
Independent Financial Adviser at R3 Wealth
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.
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Elliott Culley
Director at Switch Mortgage Finance
Unfortunately, this is no big surprise. The cost of living and the increase in mortgage costs for some borrowers will be too much and arrears were always likely. Hopefully, we will see an end to base rate rises which have fuelled this increase. However, I do think we still have a couple of increases to go. The Mortgage Charter can help some borrowers, but only for a short period of time, so won't fix this issue.
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Ranald Mitchell
Director at Charwin Mortgages
This is a telling sign that people are struggling. Big jumps in arrears figures as mortgage rates, inflation and the costs of living all take their toll. There is likely worse to come with unexpired fixed-rate products propping up many households will come to an end, and many of these people will not be able to withstand the payment shock. Those who have the opportunity to prepare for fixed rate expiry would be well served to do so well in advance.
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Kundan Bhaduri
Property Developer and Portfolio Landlord at The Kushman Group
Global economic uncertainty and lingering effects of COVID-19 have left families grappling with financial challenges and the BoE data reflects that. Job insecurity, wage stagnation and rising living costs have put additional strain on household budgets. While interest rates remained historically low for well over a decade, a sharp increase of 5000%+ of 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. Skyrocketing house prices have also made things difficult in the past two years. As a result, many took on larger mortgages relative to their income, making them more vulnerable to financial shocks and arrears. There's also the lingering effect of mortgage holidays from the Covid era many are grappling with. Many borrowers deferred their mortgage payments, accumulating interest arrears that are now coming due as these support measures wind down.
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Justin Moy
Managing Director at EHF Mortgages
The effect of higher mortgage rates is just starting to reflect heavily in the Bank of England data, with significant increases in arrears, both in pound value and cases, and we still have significant numbers of borrowers yet to move to their new rates before the end of the year. The Mortgage Charter does have some benefits for short-term support, but for many this is not enough to ride the high rates and increased cost of payments. The Government really needs to look to extend this support if the Bank of England are already on record suggesting this will take more time to resolve than first thought. Much of this data will have a 3-6 month time lag given the pipeline of applications yet to complete, but these signs are worrying and the borrowers need intervention quickly.
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Jamie Lennox
Director at 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.
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Imran Khan
Co-founder & CEO at PropertyLoop
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.
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Graham Cox
Director at Bridging Hub
These are truly shocking numbers, and the most worrying part is we're not even close to being through the worst yet, as there's still millions of households who need to refinance their mortgage over the next year or two. 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.
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Graham Taylor
Managing Director at Hudson Rose
There is no way to spin this, it does not make pleasant reading. The fear has always been that the Bank of England has moved the rate too high and too fast and many more families will likely be affected as they come off their historically low fixed rates.vThe sting in the tail is, due to the ONS miscalculation, the economy was perhaps more resilient to taking a base rate rise earlier, which could have helped cool the economy before it started to run too hot and eased the need for such a forceful Bank response.
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Darryl Dhoffer
Founder at The Mortgage Geezer
So, the plans outlined by the Government and the Bank of England to draw down inflation are now having these tragic results in arrears. This has got to stop, and both the Government and the Bank of England need to be held accountable for their actions. Forecasting a stat on paper is one thing, but living the experience for already hard-pushed consumers is tragic to say the least. These arrears will continue for months if not years ahead, unless both the Monetary Policy Committee and the Government work closer together to look at other taxation options and benefit schemes to alleviate the pressure that households are experiencing. 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.
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Gary Bush
Financial Adviser at MortgageShop.com
This arrears news is saddening but expected when looking at the speed in the increase of the Bank of England base rate. Anyone experiencing problems with making their mortgage and other payments needs to consult with a suitably qualified advice firm who can step in and assist in these circumstances. Account holders who don't adequately communicate with their lenders experience worse outcomes.