Value of UK mortgage arrears jumps by a third

The value of UK mortgage arrears jumped by almost a third in April to June compared with the same period last year, the Bank of England has said.

Outstanding mortgage debt is now £16.9bn, the highest since 2016, it said.

Mortgage costs have risen for millions as the Bank has repeatedly hiked interest rates to slow soaring prices.

Some experts warn defaults will rise, but others say the number unable to repay remains relatively low.

According to the Bank, in April-June 16% of mortgages in arrears were new cases, which it said “was little changed compared to the previous quarter”.

It added that the proportion of mortgages in arrears was the highest since 2018.

As of Wednesday, the average rate on a two-year fixed mortgage deal was 6.64%, according to the financial information service Moneyfacts. For the first time in two months, it has dropped back below the peak seen after the mini-budget when Liz Truss was prime minister.

The typical rate on a five-year deal is 6.14%, according to the Moneyfacts data.

Those rates means those searching for a new deal could end up paying hundreds more per month compared with their previous mortgage.

Riz Malik, director of Southend-on-Sea-based broker R3 Mortgages, said: “The swift escalation in [Bank of England] rates was bound to significantly impact default rates, and it’s likely the situation will deteriorate further”.

But Simon Gammon, managing partner at Knight Frank Finance, said that despite the “sizable jump” in arrears, “the proportion of outstanding mortgage balances in arrears remains low at just 1%”.

Mr Gammon added: “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.”

He said that the buy-to-let sector was more likely to see arrears, as landlords suffering from unaffordable mortgages had limited choices – either sell or default.

The Bank of England is expected to raise borrowing costs again later this month, taking the Bank rate to 5.5% in the hope that economic activity will slow, bringing down inflation, the rate at which prices are rising.

The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, reducing demand and slowing inflation.

However, although inflation is showing signs of slowing, the current rate of 6.8% is much higher than the government’s 2% target.

Myron Jobson, senior personal finance analyst at interactive investor, said that while higher monthly mortgage repayments could lead to a rise in mortgage arrears, higher wages and current levels of low unemployment “could slow the rise in repossessions”.

Analysts agree that there is little sign of a return to the ultra-low mortgage rates of less than 2% that benefitted homeowners for more than a decade before late 2021.