The Financial Conduct Authority (FCA) has warned that thousands of households could be forced to default on their mortgages over the next two years.
The watchdog confirmed that by June 2022, over 200,000 households (around one in 40 mortgages) had fallen behind on their mortgage payments by thousands of pounds. Of these households, 117,000 had failed to pay over 1.5% of the balance of the mortgage.
The FCA predicts that a further 570,000 mortgages were “at risk of payment shortfall”, as mortgage deals come to an end over the next two years and payments become unaffordable for many. Those affected will find their mortgage costs increase to over 30% of their income.
The economy is expected to further squeeze living standards and the possibility of recession has put jobs at risk.
The Bank of England expects the average payment increase for millions of home owners to increase by £3,000 a year. It is feared this will lead to the forced sale of many properties which could result in house prices falling in the next year.
Office for National Statistics data recently showed that the monthly payments of 815,000 households will triple during 2023. The ONS estimates that 1.4 million households currently benefiting from fixed interest rates below 2% will need to remortgage this year.
A typical 25 year mortgage term on a £250,000 property might see monthly payments increase to £1,416 from £516, based on current interest rates. FCA chief executive, Nikhil Rathi, has said that these assumptions are based on the interest rate expectations on the day of the mini-budget, 23rd September 2022, when interest rates were expected to peak at 5.5%. This is now expected to peak at 4.5%, which could lead to fewer defaults than predicted.
Those particularly at risk of are younger borrowers, people under 30 who have stretched their resources to get on the property ladder while taking advantage of low fixed rate mortgages of around 2%. These borrowers are more at risk of finding themselves in negative equity, and around 140,000 are thought to be in danger of owning a property worth less than the mortgage if there is a decline in house prices.
Borrowers using the Help to Buy scheme (which required home buyers to put down just 5% deposit) were further at risk due to the requirement to begin paying interest on the interest-free component of their house purchase, combined with increased interest rates.
The number of repossessions is currently ‘low’ according to the FCA. There were 835 repossessions to June 2022, but it is thought likely that court backlogs resulting from the pandemic could have skewed the data.
After the last financial crisis, a total of 48,900 properties were subject to repossession in the year to March 2009. At this time, house prices dropped by over 20%.
The worst forecasts in the current financial crisis suggest a potential drop of 9% in house prices between 2022 and the end of 2024.