"We expect mortgage arrears to rise sharply over the next 12-18 months as these customers revert to higher interest rates and these loans season," Mr Mott predicted. However, he still expects a growing number of customers to fall behind on repayments and potentially default on their mortgage. He also said banks may encourage some customers to sell their properties before they default. Mr Mott said banks are likely to help many customers in this group to avoid default by putting some onto interest-only repayment periods or extending the term of the loan, both of which reduce repayments in the short-term but increase the cost of the loan over its life. This group of borrowers unable to refinance their loans have been widely dubbed "mortgage prisoners". With interest rates rising, it may be a smart move. NAB has responded to the report, and said its chief financial officer recently estimated that between 15-20 per cent of borrowers were in this situation, with current estimates from the bank sitting at 16 per cent. This is consistent with estimates from NAB." "Our survey indicates around 20-25 per cent of this cohort of mortgagors are in this predicament. "With APRA requiring the banks to continue using a 3 per cent serviceability buffers, many customers who took out mortgages during 2020-21 are now likely unable to refinance their mortgages and are facing significant financial stress. "With around $360 billion of fixed rate mortgages maturing this year many customers are facing an increase in interest rates from around 2 per cent towards 6 per cent," he wrote. 3.What percentage of your customers are unable to get the loan size they need to buy the home they want?īarrenjoey banking analyst Jon Mott said the answers would concern bank bosses, and also highlight the problems confronting many home owners.2.What percentage of refinancing customers do you expect to be rejected due to falling property prices or reduced borrowing capacity as rates rise?.1.What percentage of your customers who took out a low-rate fixed loan during the COVID period do you expect to refinance with a different lender when the fixed rate ends?.The move means that from 9 January lenders have agreed to grant mortgages when borrowers look to buy, sell, or remortgage flats impacted by cladding.The research, a survey of 1,641 mortgage brokers conducted for investment bank Barrenjoey over the past eight months, asked brokers three key questions. Last month, lenders said they would consider mortgage applications on flats in buildings in England over five storeys (or, 11 metres) from next month, according to a statement from key mortgage firms and the Royal Institution of Chartered Surveyors. It says its Modified Affordability Assessment, following its 2021 review, “reduced regulatory barriers” firms are required to use when deciding whether to offer new deals to these borrowers.īut it adds: “We should be clear that we cannot force any firm to lend to borrowers who fall outside their risk appetite.” The body explains that risk appetites among lenders were tightening at this time, in the wake of the financial crisis, and left these mortgage holders unable to switch to cheaper loans because more recent criteria rules fall outside their loan, or, borrower characteristics. The FCA head wrote: “We focused on this group because the vast majority of mortgage prisoners have a mortgage from a firm that is no longer lending to new customers and most of these mortgages were sold before 2008/9.” Turning to mortgage prisoners, Rathi estimated that 47,000 households in this position, out of 195,000 mortgages held in closed books with inactive firms following its review in the first half of 2021. The FCA defines a mortgage borrower that is “at risk of payment shortfall” as anyone that spends more than 30% of their gross household income on mortgage payments. If as many as 770,000 households did default, that would mean around 9% of the UK’s mortgages would be overdue. UK average wage growth is currently behind inflation, which is 10.7%, according to the Office for National Statistics. The watchdog added that a further 570,000 households are “at risk of payment shortfall” over the next two years, assuming that UK households suffer a 10% fall in income over this period due to cost-of-living pressures. It estimated 200,000 households had fallen behind on their home loans by last June, accounting for 2.4% of all regulated residential mortgages. In a letter to the House of Commons Treasury select committee released earlier this week, the FCA chief executive Nikhil Rathi laid out the watchdog’s latest findings on home loan defaults, mortgage prisoners and dangerous cladding on flats. Over 750,000 UK households are at risk of defaulting on their mortgage payments over the next two years, while another 47,000 are trapped as mortgage prisoners, according to the Financial Conduct Authority.
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