Why mortgage arrears are set to rise – and Base Rate isn't to blame

Thousands of borrowers are facing a harder time making their repayments due to Government changes to its Support for Mortgage Interest scheme.

On the face of it, things look pretty good when it comes to people keeping up with their mortgage repayments.

Earlier this month UK Finance, the trade body for mortgage lenders, released its latest update on the arrears situation and it made for pretty heartening reading.

In the second quarter, there were nearly 76,000 homeowner mortgages which were in arrears of 2.5% or more of the balance they still owe.

That might sound like a large number, but it's down by 8% on the same period of 2017.

The number of borrowers in significant arrears – 10% or more of the outstanding balance – has fallen to 23,190.

Tied into this, the number of homes repossessed also fell, reaching 1,060 in the three month period, 5% fewer than were repossessed in the same quarter of 2017.

As the trade body was keen to point out, both arrears and repossessions are now at their lowest point since this data was first collected 24 years ago.

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Why things are set to get MUCH worse

That’s all unquestionably good news. However, there is an arrears problem on the horizon and it stems from changes the Government has made to the support schemes open to borrowers who are struggling with their repayments.

The support for mortgage interest (SMI) scheme was a form of benefit, available to borrowers who were out of work, and offered them some financial help in paying off the interest portion of their mortgage.

However, since April this year, it has been changed and is no longer a benefit. Instead, it is offered as a loan, meaning it needs to be repaid – with interest on top – either when you die or sell your home.

Clearly, this is a very significant change - whereas before these people were getting a helping hand, they are now being offered a further debt burden.

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How are they going to pay?

Perhaps unsurprisingly, large numbers of former SMI recipients have declined the move over to the new loan version.

According to figures from the Government, last year there were around 124,000 people claiming SMI.

Yet new data from the Department for Work and Pensions shows that 61,000 people have so far outright declined the loan, while the Government has failed to actually get in contact with 15,000.

Given the Government had anticipated 100,000 people taking up the new SMI loan, that’s quite the shortfall.

All of which leaves the very real question of just how the people who have turned down the loan are actually going to meet their repayments?

These vulnerable borrowers have been reliant on the helping hand offered by the SMI scheme in order to keep up with their mortgage debt, but with that support scrapped, it seems inevitable that a decent proportion will fall behind on their repayments.

Even UK Finance itself warned that the “disappointing” uptake of the SMI loan meant that arrears could start creeping upwards in the months to come.

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Lenders: the ball is in your court

I think it’s understandable to be a little sceptical about just how adequately the Government has explained the SMI change to recipients.

Let’s be honest, it’s pretty staggering that it is apparently unable to get in contact with thousands of people, yet is still more than capable of paying them specific benefits every month.

And so the responsibility for handling this mess will fall to the lenders. They, after all, are the ones who will be financially on the hook for this, with borrowers who previously maintained their repayments now falling behind.

Some will be better at this than others.

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The Building Societies Association, the trade body for mutuals, has put together a really nice guide alongside National Debtline on what to do if you can’t pay your mortgage.

Its members have also been proactive in contacting borrowers who previously received SMI to get an idea of their repayment plans for the future.

UK Finance says that its members have taken a similarly proactive approach, though it is only in the months to come that we will see just how many of these borrowers do fall behind on their repayments, and how lenders handle that situation.

Repossession is generally seen as a last resort as taking the property over and then having to sell it on – potentially for a loss – can be more costly than offering help to keep the existing borrower in the property.