Mortgage arrears fall despite end of furlough scheme and rising living costs

Most borrowers are managing to keep up with their mortgage and loan repayments, despite continued increases in the cost of living.

The latest Household Finance Review from UK Finance, the trade association for the UK banking and financial services sector, shows that mortgage arrears are still trending down and as yet there are no signs of problems in unsecured borrowing.

The decrease in the number of customers in arrears with their mortgages in the last three months of 2021 maintained a trend that was seen throughout the year and came despite the Coronavirus Job Retention Scheme closing at the end of September.

"Although reportable arrears take some time to build up it is encouraging that, following the end of this support, there was no immediate increase in borrowers unable to meet their monthly mortgage payments, having held arrears at bay with the help of that temporary support from industry and government," UK Finance said.

Overall, there were 79,620 homeowner mortgages in arrears of 2.5% or more of the outstanding balance at the end of December 2021, a reduction of 750 mortgages compared with the previous quarter and 5% lower than the same period a year previously.

Payments are likely to come under greater pressure during 2022 as household budgets are squeezed by rising prices for energy, food and fuel and higher National Insurance contributions.

"It is encouraging that arrears are still trending down, with no early signs yet of any difficulties in repaying unsecured debts," said Lee Hopley, director of economic insight and research at UK Finance.

"However, while households look to be in a good position regarding payments now, we expect some increase in arrears through the year as the rising cost of living starts to bite."

Some homeowners will see their mortgage payments go up with any further interest rate rises in from the Bank of England, but Eric Leenders, managing director of personal finance at UK Finance, noted that the majority of borrowers are currently on fixed rates and will see no increase whilst on these rates.

Leenders added that responsible lending rules in place since 2014 ensure that mortgages taken out since then have a built-in "affordability buffer" to cushion borrowers against shocks to income and payments, which will help to moderate the extent of increases in arrears.

Arrears accounted for 0.84% of outstanding mortgage balances at the end of last year, the lowest level since recording began in 2007, according to separate data published by the Financial Conduct Authority and the Prudential Regulation Authority. The value of outstanding mortgage balances with arrears decreased by 2.1% in the last three months of 2021 to £13.5bn.

The outstanding value of all residential mortgage loans in the UK was £1,613.4bn at the end of 2021, 4.7% higher than a year earlier.