BDRC Continental’s Mortgage Achilles study shows there are now fewer borrowers who say they are ‘struggling’ with their mortgage than there were at the peak of the mortgage boom in 2007, largely due to the massive reduction in base rate (and therefore most mortgage rates) from March 2009.
Nonetheless, nearly a million borrowers admit they are struggling with their mortgage. ‘Struggling’ is a leading indicator of the risk of a borrower going into arrears, although it is far from inevitable – strugglers out-number those in arrears by 6:1.
Through the recession, prioritising mortgage debt and having lower pay rates have both played a part in keeping borrowers up to date with their payments. Wider household finances are also key.
Very few people struggle with their mortgage unless economic adversity hits, such as unemployment or redundancy. By previous standards, this has been an ‘unemployment-lite’ recession, but the threat remains. Long term, it is crucial that interest rates are not returned to normal levels until the threat of economic adversity recedes.
3% is a key rate threshold. Above this level, there is a clear step up in the number of strugglers. Ideally, base rates would remain under 1% until the threat of economic adversity has receded, as a 1% base rate would produce a typical mortgage SVR of around 3%.
If mortgage SVRs were around 5%, we estimate that the number of borrowers struggling would now be two or three times the current level, with at least a commensurate lift in the number of borrowers in arrears.
The main thing lenders can do to minimise the number of strugglers is to allow as many as sensibly possible to remortgage to lower cost deals. Historically, remortgaging has been a common response to cost push, in order to net a lower monthly cost.
However, a large minority of strugglers are now mortgage prisoners, which blocks off re-mortgaging as a way of cutting their costs.
An alternative is to encourage individuals who feel they are getting into difficulty to contact their lender to review their individual circumstances, to see what might be done, such as extending the term of the mortgage or allowing a short term payment holiday.
The opportunity for this sort of action will only arise if lenders (or intermediaries) encourage borrowers to make contact as, unlike being in arrears, a borrower who is struggling to pay is not visible to a lender.
Tony Wornell is director at BDRC Continental
