Acenden has released research reporting how specific economic variables, including interest rates and inflation, will impact mortgage performance over the next few years.
The ‘Mortgage Fiscal Cliff’ research reveals that, if the rate of inflation rises to 2.5% and persists at this particular level over five years, borrowers could experience as much as an 82% drop in their monthly affordability, after deductions. Acenden also warns a 2% increase in UK interest rates would put more than 150,000 additional mortgage accounts at risk of falling into arrears.
The report highlights how the changing economy might affect the mortgage market by modelling the impact of fluctuations in interest rates, inflation and wages on the average borrowers’ monthly affordability, which currently stands at £310. This is defined as the remaining funds that mortgage holders have to spend, once their existing mortgage repayments, recurring expenses and taxes are deducted.
Acenden has modelled the effects of inflation on monthly affordability by using the Consumer Price Index (CPI) forecasts as a guide. Industry bodies are currently reporting a increase of this rate to above 3% in the final two quarters of 2013, before returning to the Bank of England target rate of 2% in 2014. On this basis, Acenden has analysed the impact of these fluctuations over the course of five years.
Should other economic variables remain consistent, Acenden reports that an increase to just 2.5% would result in households’ average remaining income being as little as £56, with borrowers witnessing an 82% drop in their monthly disposable income. If the CPI rate was to average out at the lower forecast rate of just 1.8%, it would mean borrowers will still experience a significant 42% drop in spending money, with only £130 left per month.
The research also forecasts how a rise in interest rates alone, without any increase in inflation or wages, would have a similarly negative impact. An increase of just 2% to interest rates will have severe consequences, with monthly affordability falling by £184 to just £126. sAcenden says this is a significant indicator that mortgage portfolios will devalue as a result of more borrowers defaulting on their loans, should the base rate increase by just a marginal level.
However, as the economy recovers, just a small percentage increase in wages will have a huge impact on Britain’s households. If wages rise by 2.5% over the course of five years, Acenden forecasts monthly affordability to increase by £609. This would leave borrowers with almost £1,000 of disposable income after deductions. This is an increase of 196% against today’s current level.
Alex Maddox, director of business origination and development, Acenden, said: “As the economy attempts to move towards recovery, residential mortgage portfolio owners need to prepare for all the possibilities. Each variable modelled in this research can have a moderate to severe impact on excess household budget. However, if we see higher CPI and interest rates without wages growing then we will start to see a deeper and worrying problem. Given the realistic possibility of price inflation remaining above interest rates and wage growth, there will be inevitable impacts on monthly affordability for borrowers.
“As such, regular, comprehensive stress testing of mortgage portfolios is essential to ensure residential mortgage agreements are serviced in the most appropriate way and have an appropriate level of capital held against them. It is in portfolio owners’ best interests to mitigate the impact of interest rate rises, inflation and wage fluctuations to keep borrowers on affordable repayment plans and in their homes.”