Mortgage arrears grew by 28.8% since 2022, to £16.9 billion in the second quarter of 2023. The figure is the highest since the third quarter of 2016. Compared to the 2008-9 financial crisis, the number of borrowers’ arrears, who are failing to pay at least 1.5% per cent of the outstanding balance or whose properties were repossessed, is still low. Nevertheless, the number and its predictable future effects are ‘terrifying’, as argued by Lewis Shaw, founder of Shaw Financial Services, who fears a ‘mortgage meltdown’ is approaching:

“The speed at which mortgage arrears are increasing is terrifying and should give cause to pause at the next Bank of England interest rate meeting. This is dire data, and we know that it’s about to get an awful lot worse with 1.6m mortgage holders due to renew over the next twelve months at significantly higher rates than anyone has been used to for well over a decade.

We’re still at the thin end of the wedge, so unless we have a change of direction from Andrew Bailey, we’re about to see a mortgage meltdown for thousands of households that will ripple through the property market for years to come. If this isn’t the canary in the coal mine, I don’t know what is.”

Considering the data, the arrears are more likely to occur among the buy-to-let sector than in the residential mortgage market, as is explained by Simon Gammon, managing partner at Knight Frank Finance. He told the Guardian:

“The Q2 data showed a sizable jump in arrears relative to the previous quarter, but the proportion of outstanding mortgage balances in arrears remains low at just 1%. That’s because the vast majority of outstanding mortgages were issued under the post-Global Financial Crisis regime, which was much more stringent when it comes to affordability.

“While mortgage payments at today’s rates are painful and require borrowers to cut their discretionary spending, they are still technically affordable. That’s going to keep arrears low despite steep increases in mortgage rates. 

“We are more likely to see arrears in the buy-to-let sector, where landlords face a unique set of challenges. If a landlord finds their mortgage is no longer affordable, or the rent no longer covers their outgoings, they only have two choices – sell or default. If they opt to sell, they may have to wait up to a year for the tenancy to end, unless they are willing to sell with a tenancy in place, which is more difficult. Landlords are also more likely to opt to default than those struggling with a mortgage secured against their main residence, so this is an area to watch.

“Anybody struggling with their mortgage payments should speak to their lender before they default or miss payments. The lenders are required to consider various options for borrowers that are struggling, such as pausing interest payments, moving mortgages to interest only, or offering payment holidays.”

As predicted, the value of gross mortgage advances in 2023dropped further – the Q2 statistics show that it was £52.4 billion, which was £6.3 billion lower than the previous quarter, and 32.8% lower than in 2022 Q2. This was the lowest observed since the 2020 Q2. Specifically, although at the end of the quarter the outstanding value of all residential mortgage loans grew 0.4% higher from last year, 2023 experienced the largest decrease during the first quarter of this year since reporting began in 2007.

It is predicted that the Bank will announce further raises of interest rates from 5.25% to 5.5%. Kitty Ussher, the Chief Economist at the Institute of Directors, is urging the Bank of England to stop raising interest rates, keeping them on hold:

“Our own data shows that the large interest rate rise in June led to a worsening in the way that business leaders considered the outlook for the economy. The Bank of England should now give its medicine time to work. The holy grail of a soft landing where we bring inflation down without causing a recession is still possible; the risk now is that too much tightening will unleash a series of negative events that causes the Bank to undershoot its inflation target further down the line.”

The Bank of England publishes “Mortgage Lenders and Administrators Statistics” in four quarters. The third and fourth releases will be published on December 12, 2023, and March 12, 2024, respectively.