British banks to ease pressure on mortgage holders as late payments rise

Some of the UK’s largest banks have agreed measures with the government to help distressed borrowers as they prepare to increase mortgage overdue payments.

The so-called forbearance measures, which were used during the 2008 financial crisis, are an attempt by banks including HSBC, Barclays, Lloyds Banking Group and NatWest to avoid repossession and more pain for borrowers on top of soaring inflation and soaring energy bills.

Some of the measures could include converting mortgage holders to interest-only deals or moving them to competitive fixed-rate deals without the need for another affordability test.

The move follows a meeting this month between Jeremy Hunt and the UK’s largest banks, when the chancellor made clear lenders would need to help distressed homeowners pay off their debts.

It highlights the difficult time ahead for borrowers as around 1.8m people in Britain will need to re-mortgage next year as the current fixed-rate deal expires, leaving them with potentially much higher costs.

One banker said at a recent meeting that the tone was “help-biased, and we all are. The last thing any bank wants is to take back a house.”

UK lenders are already preparing to make more provisions in their full-year results in February to cover an expected increase in loan losses as more borrowers struggle to make mortgage payments.

But Nigel Terrington, chief executive of Paragon Bank, said: “Banks are likely to post strong earnings growth this year, so additional provisioning will be more affordable.”

Counselor Jeremy Hunt attends a roundtable discussion with mortgage lenders © Zara Farrar / HM Treasury

He said that the situation could not be compared to the collapse of the real estate market in the global financial crisis, when the number of overdue mortgages in the UK reached nearly 400,000.

He added, “Banks are wiser today than they have ever been, and a lot of lending has been on the lower end of the loan-to-value range.”

Lloyds Banking Group, the largest mortgage lender, said only 4 percent of its loans were above 80 percent loan-to-value.

John Cronin, an analyst at Goodbody, noted that while there will be “pockets of problems within loan portfolios, listed UK banks have minimal exposure to those low-income groups who are most vulnerable to inflationary forces.”

There is little evidence of borrower default so far, though, after the “mini” budget in September, mortgage costs rose to their highest level since the financial crisis. The financial statement boosted yields on gold bonds, which banks use to price fixed-rate mortgages.

Although rates have eased since then, they are still high compared to the beginning of the year. According to data provider Moneyfacts, the average five-year fixed-rate mortgage is higher at 5.6 percent, compared to 2.66 percent in January. The number of products has also shrunk as banks struggled to price loans and pulled deals. There were 5,394 products at the start of the year, which is down to just over 3,780.

Brokers have warned that higher rates and pressure from inflation will cause more borrowers to default in 2023. “There’s no doubt we’ll see arrears go up, even though they’ve been at historically low levels for some the time “.

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According to banking industry body UK Finance, the number of delinquent mortgages is expected to reach 98,500 next year, up from 80,100 in 2022.

The number of housing transactions is also likely to decrease as prices fall and home movers in particular grapple with the prospect of getting a more expensive mortgage.

“There is weak demand from home conveyancers, who will consider how much a larger mortgage could cost them,” said Roland McCormack, TSB’s director of mortgage distribution.

UK Finance said it expects transactions to fall by a fifth next year. Total lending is expected to drop to £275 billion in 2023, down from £322 billion this year.

James Thatch, data and research expert at UK Finance, said: “As we look ahead, the mortgage market is expected to enter a period of relative weakness from next year as housing prices, cost of living and interest rate pressures put the brakes on new demand.”

Banks said they are ready for patience plans. Barclays UK chief executive Matt Hammerstein said it has a “dedicated team” for borrowers who need support and can convert them to interest-only terms among other solutions.

HSBC said the options included switching the product to lower the interest rate, a reduced payment arrangement and an extension of the term. Nationwide said it would allow borrowers to temporarily reduce monthly payments or extend the term of their mortgage to reduce monthly costs as part of its measures.

Allison Rose, CEO of NatWest, said: “We’ve proactively reached out to customers 8 million times so far this year to help them take more control of their finances, and we’ll continue to play an active role in supporting customers and communities across the country.”

However, home repossession is a last resort. “Repossession can take up to two years before it’s awarded, so any increase in the number of repossessions would be modest,” said Bulger of John Charcoll.

The Bank of England raised interest rates again this month, to 3.5 per cent, although some brokers argued that more expected rate hikes were already priced into the gold markets.

Some brokers predicted that banks would struggle to pass large interest rate hikes in light of the weak housing market.

“Demand for real estate has already slowed, so I expect lenders to do more to attract borrowers next year,” said Aaron Strutt, a broker at Trinity Financial. “We’re already starting to see mortgage rates go down but they’re still much higher than they used to be.”

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