Reports on the level of arrears in the UK have been significantly greater in recent weeks, as personal finance once again comes under the media spotlight. The problems that many mortgage borrowers are having with their repayments have been well documented, not only in the pages of Mortgage Introducer, but in the national press. For many people, personal debt is a tunnel with no light at the end and worryingly, more people are joining the queue.
So what can the mortgage industry do to prevent borrowers from facing such financial difficulty, and help them when they do get into trouble? From the perspective of the mortgage lender, Alex Hammond, PR manager for Kensington Mortgages, believes that there was a responsibility for lenders to be careful when they consider who to lend to, and be sure that the borrower will not fall into arrears and will be able to make consistent repayments.
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Hammond says: “Lenders have a responsibility to treat customers fairly and make sure that their lending is suitable. We have seen problems decrease by looking at responsible lending decisions, and although we can’t always ensure that things won’t go wrong, we can be sure to match the right product to the applicant. By being sensible with criteria, lenders can be flexible and responsible.”
Predicting losses
The news on the amount of borrowers in arrears was further highlighted last week with news that the figure is expected to soon rise. With five rises in the Base Rate in the past year, some analysts have forecast that lenders will announce a rise in the amount of arrears in the coming weeks and months, with predicted losses reaching £500 million for 2007, jumping to £650 million in 2008.
Northern Rock published its interim results recently and was one of a few firms indicating that it expected to see an increase in the amount of mortgage arrears.
The report said: ‘As interest rates rise, it is inevitable that arrears will face upward pressure, particularly for those customers on variable rates. Customers on fixed rates are protected from rate rises until the end of the fixed term, when they potentially face an increase in rate as they switch product, although product developments including higher fees to offset higher rates are beneficial to customers’ affordability needs.’
Unpleasant reading
So could borrowers falling into arrears blame poor lending decisions? Could they claim, if they can’t meet their repayments, that they were put on inappropriate mortgage arrangements? Whatever the outcome, the figures do not read well.
As the Council of Mortgage Lenders (CML) stated earlier this year, repossessions rose by 66 per cent in 2006 to a total of 17,000, which is an average of one in 690 mortgage holders being unable to keep up repayments. Predicted figures for the future do not make pleasant reading either, as the CML anticipated repossessions to rise even further, to 19,000 this year, and to 20,000 in 2008.
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Christopher Dean, press officer at the CML, comments: “In 2006 arrears fell on the 2005 figure, but in the next batch of documents that we will release, we expect to see a rise in the amount of borrowers falling into difficulties with repayments. Lenders will create complex offering models to determine what products are suitable for applicants, so the mortgages they are taking out should be affordable and create an accurate picture of what they can afford.
“If they fall behind, they should speak to the lender in the first instance as they may be able to give more time and leeway to the borrower to help them pay. At the end of the day this is more about the borrower than the lender as payments will go up rather than down.
“1.8 million people will move off fixed rates at the end of their term and into an environment of higher repayments, so they should certainly plan ahead.”
Consumer appetite
So is fixed rates the cause of the problem? GMAC-RFC believes that consumer appetite for alternative products is inevitable, with more than three-quarters of all mortgage loans having been fixed rates since the beginning of 2007. It is believed that the gap between fixed and discounted products has widened, which will make the variable options more appealing to many borrowers.
Julie Gaskin, corporate relations manager at GMAC-RFC, said: “In a rising rate environment it often makes sense for borrowers to take out a fixed rate deal, especially if a future rate rise would mean their monthly mortgage repayments will increase, and this has certainly been the mantra of many a mortgage expert over the last few years. However, the tide is now turning, and fixed rates currently on offer are higher than we have seen for several years, as they are factoring in for one or more future rate rises, making tracker and discounted deals look increasingly attractive, and in many cases cheaper.
“Now is the time for mortgage intermediaries to harness the change and look towards tracker and discounted products to drive business growth as demand for this type of product will inevitably increase in the foreseeable future.”
The responsibility for borrowers falling into arrears lies with several sources – the lender – to ensure that they give the right product, the broker – to ensure the client is properly advised, and the borrower themselves – to ensure that they excercise careful control of their finances and keep up with repayments.
