HML has undertaken analysis of the performance of approximately 100,000 mortgage accounts that were subject to interest rate increases from August 2006 and tracked the arrears performance to August 2007.
The servicer maintains the largest commercially available data pool of mortgage accounts in the industry. It found that between June 2006 and July 2007 the Bank of England base rate increased on five separate occasions, moving from 4.5% to 5.75%, matching the number and scale of rate increases found in HML’s data.
As the profile of rate rises during this time could well match the pattern of rate increases that will occur from 2015, HML argues the historic performance seen on these accounts provides a suitable forewarning of what may lie in store for both borrowers and lenders.
HML observed between August 2006 and August 2007, for cases subject to an interest rate rise, the percentage of mortgage accounts that were three or more months in arrears increased by 19.6% and the average arrears balance increased by 21% for arrears cases (arrears as a percentage of balance increased by 0.62% in absolute terms).
Put in context, the percentage of accounts over three months in arrears in the UK is currently 1.85%, according to the CML. If rates were applied to the same extent across the entire population, the UK wide figure would increase to 2.12%. This is equivalent to 30,000 extra accounts moving to a three months plus arrears state within 12 months.
Furthermore, with the current average outstanding mortgage balance sitting at £113,000, according to the CML, the rise in arrears of 0.62% would see an average increase of arrears in the region of £700, a figure likely to be in line with the additional monthly mortgage payment required following interest rate increases.
HML conducted research into how a Bank of England base rate rise could impact upon mortgage arrears, to encourage borrowers to start planning now for potentially higher repayments. The UK and Ireland’s leading mortgage administration company has forecast that if unemployment continues declining at its current rate, it will hit 7% by the start of 2015.
The Bank of England’s governor Mark Carney said the base rate would remain at 0.5% until unemployment drops to at least 7%, unless inflation was to rise at a faster-than-desired pace or the low rate threatened financial stability. While a base rate rise was expected to arrive at the end of 2015 or early 2016, HML forecasts this could occur in a little over a year’s time. In addition, markets have priced in an earlier rise, while climbing house prices (with further value rises expected off the back of government’s Help to Buy scheme) could also result in the base rate rising earlier than expected.
Chief economist at the Bank Spencer Dale has also been reported in the Guardian as saying the base rate could rise in 2014 if the UK was to experience particularly strong growth.
Damian Riley, director of business intelligence at HML, said: “Our analysis has shown the direct relationship between increasing a customer’s monthly payment and the likelihood of entering or further increasing arrears. We have seen that the average increase in arrears is broadly in-line with the increased payment resulting from mortgage account rate rises, indicating, as often is the case, that customers already on the edges of affordability will be pushed further towards the brink.
“Given that the Bank of England has indicated that rates may increase in the not too distant future, our message is that this should be done with a note of caution. Lenders need time to understand the impact of account interest rate increases on their customers’ affordability and to help those who are struggling with a further reduction in their disposable income.
“By the start of 2015, on current trends we would expect arrears to fall by another 10% (relative). Any such fall could be negated following a modestly increasing interest rate, meaning the overall state of arrears in the mortgage market in 2015 could return to something like today’s level.”
John Grimbaldeston, director of products and marketing at HML, said: “The Bank of England has said the base rate will not rise until unemployment drops to 7%. With the latest figures showing that unemployment now stands at 7.7% and the markets pricing in a base rate rise earlier than expected, it is worth asking the question about what would happen to mortgage arrears should the interest rate increase next year.
“HML’s forecast also doesn’t take into account increased buyer demand – and potentially even higher house price rises – as a result of Help To Buy II. This too could force the Bank to act earlier than planned and households should start planning now for potential monthly repayment increases.
“In addition, lenders need to consider how they would address potential increased mortgage arrears on their portfolios, including engaging with borrowers to identify alternative repayment options.”
