The pandemic had a greater impact on the finances of so-called ‘non-prime borrowers’, rating agency Fitch said.
A peak in arrears is expected later this year or early 2022, with these borrowers expected to see a greater increase than prime-counterparts.
Payment holidays and the furlough and self-employed government schemes have combined to delay arrears and reduce the shock to household income in both non-prime and prime cases, Fitch said in a report on mortgage arrears of Residential Mortgage-Backed Securities (RMBS).
UK prime transactions on payment holiday peaked just below 20 per cent in May 2020, falling to below 10 per cent by August 2020.
Payment holidays were taken conservatively by those borrowers that saw their income as vulnerable, in particular the self-employed.
Payment holidays are available until the end of March 2021, and subject to a cumulative maximum six-month term, but Fitch said it does not see another peak in payment breaks.
Lenders are likely to offer further forbearance to these borrowers who have reach the end of payment holidays and are still in financial difficulties to limit the number falling into arrears, the report added.
The moratorium on repossessions will be in effect until 1 April 2021, but is set to remain at a low level, according to Fitch.
On average, the non-prime sector’s proportion of loans in six-month plus arrears is approximately eight times the level of prime transactions.
Fitch said this is indicative of where the earliest repossessions are likely to arise.
Higher relative levels of late-stage arrears are seen in legacy assets such as Northern Rock.
Among prime borrowers, Fitch said specialist lenders’ transactions such as Charter Court and Finsbury Square, have higher than average levels of late-stage arrears because these lenders are willing to consider borrowers that high street lenders may not.