What has brought on such a projection?
An analysis conducted by Fuse, an AI-powered transaction analytics firm, has revealed an alarming forecast for the UK housing market, as mortgage defaults are expected to skyrocket by 22% within the next 12 months.
An examination of the financial statements of 10 leading UK mortgage lenders shows a substantial increase in Expected Credit Loss (ECL) provision, reaching £760 million for the current year, a significant surge from the previous year’s £625 million.
This surge is highlighted by findings that seven out of the 10 lenders scrutinized in the report expect a surge of over 10% in defaults. Notably, only one lender, the Bank of Ireland, reported a reduction in ECL allowance.
Interest rates continuing to pressurise the market
According to the report, the root cause of this impending crisis lies in mounting pressure on household disposable income, attributed chiefly to the reverberations of escalating interest rates on mortgages. The Financial Conduct Authority’s (FCA) research shows the predicament faced by approximately 1.5 million homeowners grappling with the culmination of fixed-rate mortgage deals this year. As these homeowners transition to higher fixed-rate options or variable rates, monthly expenses surge, compelling many to reduce their savings to meet repayment obligations.
This dire situation is reflected in a surge in mortgage arrears, as shown in the Bank of England’s data, which revealed a notable 9.2% increase in arrears in the fourth quarter of 2023 and a 50% increase compared to the preceding year.
Fuse’s previous research also showed that more than one in 10 individuals resort to credit to fulfill mortgage obligations. Against this backdrop, an escalation in mortgage ECL provisions highlights mounting concerns over mortgage costs.
Supporting lenders on accessing credit
Sho Sugihara, CEO and co-founder of Fuse, stressed the need for lenders to adopt more robust approaches to assess affordability and leverage data insights to support struggling homeowners.
“With homeowners under relentless pressure to meet ever-rising mortgage costs, the prospect of increased defaults appears inevitable,” he said. “In this current climate, the much publicised 99% mortgage for first-time buyers being left out of the Chancellor’s recent Budget is a welcome move – many lenders had previously raised concerns that this scheme would raise the default rate further if introduced at a point where potential homeowners’ finances were already stretched paper thin.”
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