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Arrears stable but ‘financial stress’ in customers expected to grow, lenders say

  • 12/07/2023
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Arrears stable but ‘financial stress’ in customers expected to grow, lenders say
The number of customers in arrears has stayed broadly stable over the past few months, but customers are facing significant increases in mortgage rates and could experience more financial stress throughout the year, lenders have said.

The Treasury Committee questioned mortgage lenders yesterday on the impact of rising mortgage rates on the market and customers.

Lender representatives at the event included Andrew Asaam, homes director at Lloyds Banking Group, Charlotte Harrison, interim CEO of home financing at Skipton Building Society, Santander UK’s mortgage director Bradley Fordham, home commercial director at Nationwide, Henry Jordan, and Paragon’s chief executive Nigel Terrington over a nearly two-hour long session.

Jordan said there was a “significant increase in rates for customers maturing off the original products”, and on its own book this was a £235 per month increase in mortgage payments.

Fordham noted that customers were typically coming off rates of 2.3 per cent on to an average of 4.5 per cent, meaning there was a payment increase of over £200 per month.

Jordan continued that there had not been a large increase in arrears, which were roughly stable, and customers were increasing overpayments. He also reported a growth in term extensions.

The other lender executives agreed that mortgage payments were rising but said arrears had not risen to the same extent.

Harrison explained: “I think what we’ve seen is some seasonality and trends in a customer’s entering arrears. So, we did see a modest increase in Q1 but actually arrears have come back down since then.”

She noted that there tended to be an uplift in January and the bank holidays in May contributed to the figures.

Fordham pointed to the affordability stress test, which meant payments were stressed at higher interest rates to ensure that customers can bear a “higher interest rate”.


‘We will see more financial stress that we’d have done to date’

Although lenders were in closed periods, several said they expected more customers to experience financial stress in the near future.

Fordham said Santander would “expect provision to rise very slightly in line with arrears” but that this would be a “small increase”.

Harrison agreed that Skipton Building Society would also expect a “small increase” in provisions.

She continued: “We stress test customers at a higher interest rate environment, so we stretch affordability in that assessment to ensure that we’re future proofing to as much as we can that their customers can maintain and afford those repayments.”

Harrison added customers whose deals were maturing this year, whether from a two or five-year fix, would have been making capital repayments for the most part so the balance would have been falling over time.

“We also know that we’ve just come out of double-digit house price growth, and therefore whilst those customers had been paying the capital balances on their mortgages, it also benefited from movements in house prices and therefore affording more equity in the property,” she explained.

Harrison said in the next six months she would expect to see more customers with financial stress, but this would be “relative to the to the market and I think there are options available to those customers as well”.

“So, for customers who are experiencing financial difficulties at maturity that’s when we explore and understand what kind of forbearance measures may be appropriate or not for different individuals.

“I think I would expect in this higher interest rate environment that we will see more financial stress that we’d have done to date, but I also understand that that will be spread quite differently across households and will be felt differently across households,” she noted.

Asaam added that, historically, mortgage arrears had been highly correlated with unemployment, and while rising financial costs due to inflation were “challenging”, unemployment was still “low”.

“That obviously provides people with options and finding different ways to manage their payments is challenging, but they still have unemployment is still low,” he said.

Base rate could hit 6.5 per cent

When asked about base rate expectations, Jordan said the internal expectation was that the base rate would get to about 6.5 per cent and then fall to just under four per cent over the next couple of years.

This was broadly agreed with by the other lender executives.

Harrison added that Skipton Building Society expected the base rate to continue to rise towards the end of the year and then “fall back moderately”.

“We’re not expecting that it will go back to what we’ve seen in 2021/2022 in the immediate future,” she said.

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