Arrears and default interest rates have been hotly debated in the bridging market over the last few months and now the adviser trade body has made its concerns public.

In its quarterly update AMI was confident that lax lending standards would not be an issue in the residential market, but raised the issue of the short-term sector, where it said arrears have risen and lenders are preparing for that.

“AMI notes that the incidence of arrears on short-term finance loans funded by peer-to-peer and other bridging lenders has already risen,” it said.

“The number of borrowers falling behind on loan repayments, albeit in unregulated markets, is steadily climbing.

“Anecdotal evidence indicates that short-term lenders are beefing up collections departments in anticipation of further arrears; it may be that the longer term regulated market should consider its own readiness for rising arrears, particularly as the short-term sector usually leads the residential market where arrears and possessions are concerned,” AMI added.

Robust underwriting and risk

Last week in his regular column, Association of Short Term Lenders (ASTL) CEO Benson Hersch said “there is no place in the bridging market for excessive charges”.

The trade body has also previously warned that with the slowing property market it was taking borrowers longer to sell properties and repay loans, and that brokers need to do their homework on lenders.

In response to the AMI comments, Hersch told Specialist Lending Solutions: “It looks like arrears on short term loans are becoming more of an issue, as we had expected, and the recent demise of Lendy will cause many to speculate whether other lenders will be next.

“This is a timely reminder about the importance of robust underwriting and risk controls.

“Anyone can lend money, the art is being paid back – and so lenders need to make sure they have the appropriate skills and processes in place to ensure they are making the right lending decisions.”

Defaults should be last resort

Earlier this month Octane Capital hit out at other lenders for using high default interest rates and charges.

In a statement, Oblix Capital said it also supported moves to increase transparency, professionalism and the reputation of the industry.

However, it argued that lenders should always prioritise client engagement to find an alternative approach, with default rates only coming into force as a last resort, once all other options have been exhausted.

Oblix Capital sales director intermediary and network Andy Reid said: “As the end of the facility term approaches, we would much rather engage in discussion with the borrower to identify whether repayment of the facility is likely by the due date and, if not, we explore alternative options.

“If, for example, there is a viable, but slightly later exit plan in place, we could extend the existing facility without incurring any default charges.

“Alternatively, we could look to re-structure the loan, perhaps by moving to a different product.”

Using its proprietary risk modelling tool, the specialist lender’s analysts tested a series of scenarios based on 750,000 loans with an outstanding value of £97.2bn across the UK mortgage lending market.

The model shows that, with a no-deal Brexit involving no government intervention, there would be a sharp increase in the number of borrowers falling more than three months behind on their repayments, potentially one third higher than if Britain were to remain in the European Union.

This would mean that by spring 2022 there would be 70,296 Britons more than three months behind on mortgage repayments, compared to 52,755 if Britain were to remain in the EU.

Repossessions would also rise by about ten per cent.

The model also forecasts that, five years after a no-deal Brexit, an extra one million Britons would still be repaying a mortgage.

Under current conditions, the same people would have either refinanced away from their existing lender or taken outright ownership of their home.

This would be driven by an expected decline in house prices and reduced mortgage finance availability, that would impact the amount of equity in the typical mortgage account.

Over the same five-year time frame, new mortgage lending would drop by about 17 per cent relative to what would be expected without a British departure from the EU, and comparatively benign housing market conditions.

How the analysis works

The economic assumptions used in Kensington’s analysis are similar to the official models used by the Office for Budget Responsibility (OBR) and assume that house prices would grow 18 per cent in the following five years and unemployment would remain flat.

Kensington’s Vector tool, which tracks the performance of loans over the past 20 years, predicts detailed information on loan repayment patterns and a borrower’s ability to repay debts when presented with forecasts for house price movements, unemployment levels and other macro-economic inputs.

Kensington also modelled what would happen in a no-deal Brexit where the Bank of England launched a large-scale intervention in financial markets, offering emergency liquidity to the banking sector and a reduction in market interest rates.

Under this scenario, the impact on homeowners would be substantially reduced. On some measures, homeowners would be better off in this scenario than they would were Britain to remain in the EU – although this gain would come at the expense of the public finances.

With a large-scale Bank of England operation in place, the model suggests that the number of borrowers more than three months behind on payments would be 3.7 per cent lower than if Britain remained in its current trading position with Europe. The level of defaults would be unchanged.

Bank of England would have to intervene

Commenting on the research, Mark Arnold, CEO of Kensington Mortgages, said: “Leaving the EU with no deal in place would, according to our model, see more homeowners struggle to make their monthly payments.

“Our expectation, however, would be that if we did end up exiting without a deal then the Bank of England would step in, as Mark Carney has hinted recently, and stabilise the market.

“Yet that would come at a cost to the taxpayer, with the public finances propping up homeowners at other people’s expense.”

Hurt first-time buyers

He continued that the data shows more people were struggling to get on the housing ladder, with the number of mortgages falling every year since 2008.

“If there was an intervention it would mostly benefit existing home owners by inadvertently artificially propping up prices, to the detriment of would-be first-time buyers.

“So there would likely be some collateral damage under a no-deal scenario, and the number of mortgages may fall further still as a result.”

Risks are highest for borrowers already on higher interest rates, such as those in the second charge mortgage sector, according to Jonathan Davidson, the regulator’s executive director of supervision, retail and authorisation.

The FCA found lenders are not always properly assessing whether payment plans for customers in long-term arrears are affordable, which could erode equity in their homes if they are eventually repossessed.

The regulator is particularly worried about the treatment of vulnerable customers who are behind on mortgage repayments.

Growing number of long-term arrears

In 2008 there were around 56,000 people in serious arrears.

Despite low interest rates and economic recovery, the number had increased to 70,000 by 2016.

At the same time, the repossession rate has plunged from 22% to 2.7%.

But when interest rates and mortgage rates rise, the repossession rate could again rise.

And customers who have been in long-term arrears risk with increasing debts could end up with less equity in their homes as a result, Davidson told Mortgage Solutions.

The regulator carried out its review of long-term mortgage arrears – those behind by 12 months or more – and forbearance to check whether customers in these situations were being treated fairly.

Davidson said: “There were a few isolated cases where firms weren’t really doing a proper assessment of whether the payment plan was affordable – the net effect is customer equity is reducing.”

Concerns for vulnerable customers

The sample review of customers from eight lenders across the marketplace showed the industry is largely operating as it should.

However, the regulator was also concerned about the treatment of vulnerable customers.

Davidson said: “We’re talking about huge debts. If thing go wrong for people, for example, those recently bereaved or in hospital, there needs to be understanding on what the impact might be on their ability to service repayments and plan appropriately.”

He added that some lenders weren’t identifying these customers particularly well, while others weren’t particularly empathetic.

The FCA has given feedback to the lenders in the sample and is now considering whether to launch a formal investigation into any of the providers based on wrongdoing uncovered in the review.

The financial watchdog said it is now considering further regulatory action against lenders whose customers have had a poor experience of mortgage arrears management.

It said many customers in this situation are treated fairly.

But inconsistencies in practices had the potential to cause harm and were identified in the FCA’s review of long-term mortgage arrears and forbearance.

Potential for harm

The review focused on customers with mortgage arrears of more than 12 months and included large retail banks, building societies, non-bank lenders and closed-book lenders.

The FCA found cases in the review sample where lenders had incomplete customer case files, which meant customers had to keep repeating their circumstances.

Vulnerable customers were not always given the appropriate level of support.

In other failings, payment arrangements were not regularly reviewed, and in some cases, customers received inaccurate information.

Firms were also found to repeatedly pursue arrangements to pay when other repayment options could have been more suitable.

And there was not always an end-to-end review of customer experience, with some customers required to fill out detailed forms without support.

Customers harmed by poor practices may struggle to recover from arrears and could ultimately see their home repossessed with reduced equity in their home, the regulator said.

The FCA has provided feedback to firms in the sample.

Customers generally treated fairly

The review comes after the regulator previously found more borrowers have fallen into long-term arrears, as lenders repossess fewer homes.

Under the FCA’s rules, repossession must be considered as a last resort for lenders.

Overall, the regulator concluded customers in these circumstances were generally treated fairly.

However, it stressed that customers in long-term arrears, or who might go into arrears with an increase in interest rates, must be made aware of what actions they should be taking.

Jonathan Davidson, FCA executive director of supervision said: “We know that many customers remain hesitant to contact their lender to discuss their mortgage arrears for a variety of reasons.

“We encourage customers to talk to their lender as early as possible as this may give them more time and options when it comes to the steps they can take.”

Jackie Bennett, director of mortgages at trade body UK Finance, said: “It is encouraging that overall the FCA did not identify widespread harm to customers from extended forbearance.

“The industry acknowledges the regulator’s findings of some inconsistencies in firms’ arrears management practices.

“Anyone with concerns about making their mortgage repayments should contact their lender as soon as possible to discuss the support and options available to them, a message echoed by the FCA.

“UK Finance will continue to engage closely with the regulator, lenders and administrators to deliver fair outcomes for those customers in financial difficulty.”

It is the first increase in the value of write-off since 2013/14, the group said.

There was £122m worth of lending written-off this year, up from £77m in the year prior, according to the analysis of Bank of England data.

Moore Stephens said the increase could signal distress in the housing market and noted that at the same time house price growth has stalled across the UK.

Further interest rate rises could deepen the issue, the firm added.

In 2009 UK banks were forced to write-off £984m against residential mortgages.

Jeremy Willmont, head of restructuring and insolvency at Moore Stephens said: “The interest rate cycle has turned.

“The unfortunate collateral damage of interest rate rises is more financial pain amongst mortgage holders and more personal insolvency.

“Increasing mortgage write-offs could suggest the economy is beginning to display signs of slowing down.

“Whatever type of Brexit we end up with, concerns have been raised about the potential impact on the economy.

“We could see more unemployment and more mortgage repossessions, and the Bank of England has said that a soft Brexit is likely to be followed by more interest rate rises.”

The number of homeowner mortgages in arrears of 2.5% or more of the outstanding balance fell by 5% in the third quarter of 2018, compared to the same period last year, according to the latest figures released by UK Finance.

Within the total, homeowner mortgages with more significant arrears remained unchanged at 24,090 in Q3 2018 from the same quarter of the previous year, representing 10% or more of the outstanding balance.

The number of buy-to-let mortgages in arrears of 2.5% or more of the outstanding balance fell by 1% in Q3 2018 from the same quarter of the previous year, standing at 4,660.

Within the total, there were 1,150 buy-to-let mortgages with more significant arrears, representing 10% or more of the outstanding balance. This was 3% higher than in the same quarter of the previous year.

Mortgaged properties taken into possession in Q3 2018 decreased by 19% at 1,080 from the same quarter in 2017, whilst the BTL mortgaged properties taken into possession fell by 17% at 500 in Q3 2018, compared to the same quarter last year.

Jackie Bennett, director of mortgages at UK Finance (pictured), said that it is encouraging that homeowner arrears and repossessions remain at historically low levels, which shows the vast majority of borrowers continue to repay their mortgages in full and on time each month.

Possessions may be declining

Jonathan Harris, director of mortgage broker Anderson Harris, said that possessions may be declining but that can change and borrowers need to be prepared.

He added: “We suspect that when it comes to their finances there are many people who don’t have a buffer to tide them over should they get into difficulty.

“While interest rates remain low, despite two rate hikes in the past year, they could rise further. Borrowers must plan ahead and consider how they will cope if this happens. Fixed-rate mortgages give certainty and help with budgeting, while remaining competitively priced.

“It is also vital that borrowers keep their lender in the loop if they are struggling to pay their mortgage. Lenders are being flexible and showing forbearance but it is much easier and less stressful to come up with solutions early on than further down the line when options may be much more limited.”

Data from the trade body showed that out of more than 9m residential mortgages, just 76,740 were in arrears of 2.5% or more – 8% fewer than at the same point last year.

This was echoed in the buy-to-let market where just 4,400 mortgages had arrears of 2.5% or more from a total book of 1.9 million, down 6% from Q2 2017.

The number of residential and buy-to-let mortgages in arrears fell by at least 4% at all levels, aside from buy-to-let loans with more than 10% arrears, which grew by 2% to total 1,080.

Repossessions also fell notably between April and June compared to the previous year.

There were 1,060 homeowner mortgaged properties taken into possession in the second quarter of 2018, 5% fewer than the same period last year. While buy-to-let possessions fell 24% to 520.

Potential for arrears increase

UK Finance director of mortgages Jackie Bennett has previously warned that arrears and possessions were likely to rise over the coming year following base rate rises and the changes in Support for Mortgage Interest (SMI).

Bennett welcomed the continued fall in these measures but reiterated her warning.

“Arrears and possessions are at an all-time historic low since we first started collecting this data over 24 years ago,” she said.

“While this is positive, last week’s base rate rise coupled with the disappointing uptake of the Support for Mortgage Interest (SMI) loan could see arrears creeping up in the coming months.

“With well over 90% of new loans taken out at fixed rates, most recent borrowers will see no immediate impact from the bank rate increase,” she added.

The trade body noted that anyone with concerns about managing their mortgage should contact their lender to discuss the advice and support available and that repossession was always a last resort.

The lender is introducing two new tiers of products to support customers with these and other credit issues such as bankruptcy or possessions.

Aldermore will now consider borrowers with:

• CCJs or defaults registered over six months ago;
• Bankruptcy or Individual Voluntary Arrangement (IVA) discharged for two years;
• Mortgage or secured loan arrears over three months ago;
• Forced or voluntary possessions older than three years.

The deals are available up to 80% loan to value (LTV) and come with a £999 product fee.

Standard Mortgage Range Level 2, at up to 80% LTV includes: two-year fixed rate from 3.98%; three-year fixed rate from 4.08%; and five-year fixed rate from 4.18%.

Standard Mortgage Range Level 3, at up to 75% LTV includes: two-year fixed rate from 4.48%, three-year fixed rate from 4.58%, and five-year fixed rate from 4.68%.

Aldermore commercial director, mortgages Charles McDowell, said the lender wanted to support those people with small credit issues.

“We understand that people’s situations can be complex but we are passionate about supporting the nation’s homeowners.

“We have worked closely with our intermediary partners to design a process that makes the journey of using our tiered products as simple and straightforward as possible for both the broker and the borrower,” he added.

Speaking at the UK Finance annual mortgage lunch, Bennett noted that arrears were at a historic low in 2017 with 89,000 people with arrears balances of 2.5% or more of their outstanding mortgage.

However, she warned that the trade body is expecting those numbers to increase this year as some households come under pressure from base rate rises and others will be affected by the changes in Support for Mortgage Interest (SMI).

Bennett highlighted that of the 90,000 eligible SMI claimants, the vast majority had not yet applied to convert their benefit into a loan.

“UK Finance has been coordinating efforts with lenders, debt advice charities and others to try to ensure recipients are made aware of the changes and take action. We have also been liaising closely with the government,” she said.

“Lenders have been contacting customers and discussing options with them for making up the payments if they do not want to take out the loan.

“However, that’s not an option for everyone and unfortunately some may fall into arrears. Repossession is always a last resort and we will continue to monitor the situation closely over the remainder of the year,” she added.

Long-term fixes and modest growth

Bennett also revealed that longer term fixes were becoming far more popular and that sustained modest growth was expected for the market.

“So far this year nearly half of new fixed rate business has been at five years or more, compared to around a third over the last few years,” she said.

Bennett continued: “We expect gross lending to be around £260bn in 2018, the highest figure for a decade.  And we expect that to grow modestly in 2019 too, to around £271bn.

“This is not back to the level of the heady days of the mid-2000s –  which is probably a good thing,” she added.

Even when the lender does finally take action it can sometimes be delayed by the court process so that the borrower ends up staying in the property for a number of years from when they first encountered financial difficulties.

Some repossessions can be delayed further by some lenders’ reluctance to repossess due to a potential perceived reputational impact or even customer vulnerability; but it doesn’t have to be like that.

Delaying the inevitable

If the property ultimately gets repossessed it is not good for either borrower or lender to drag it out for years.

For the borrower they have only delayed the inevitable, only they will now have incurred far greater debts than they would have done if the property had been repossessed more quickly.

At the same time the property is likely to have depreciated, as people in danger of repossession rarely spend time or money on maintaining their home.

This means that the property is worth less when it comes to sell, or it needs a lot of work done on it before the sale.

This is likely both to delay the sale and can mean the property sells for a lower price which will directly result in less money being returned to the borrower or their debts being higher.

Increased stress

Keeping someone in a property where repossession is clearly the ultimate outcome can be the wrong thing to do.

It can result in a stressful time for both borrower and lender with higher debts amounting.

Handled correctly it is possible to do things more quickly while finding the best outcome for the borrower.

Sitting down with the borrower face-to-face right at the beginning of the process and discussing their options is a great help.

Retain sale profit

Making sure that the borrower is aware of the repossession process and the outcomes is crucial – few borrowers realise that if their house is worth more at sale than the amount owed, then the additional money will be returned to them for example.

So many borrowers only realise this at the end of the process after their house has become dilapidated and they are potentially worse off as a result.

There are a number of options for people in arrears – repossession or sale are just two, but equity release is also an option for a growing number of older people, especially those with interest only mortgages who find they cannot pay off their outstanding balance.

If repossession is the only answer, putting off the inevitable is a solution that helps no-one.