Consultant Zone

Affordability and ‘breathing space’ arrangements

In May we discussed the UK Finance arrears data,  but the situation is expected to get worse as mortgage rates continue to rocket. Coupled with the cost-of-living crisis households are understandably already feeling the strain.

Some commentators are keen to talk down the risk households currently face, pointing out that mortgage rates, despite recent increases, remain around 6%, still low versus rates in the 90’s and earlier. However, in terms of affordability, the issue is not simply limited to the actual rate paid, although that has an impact.

Of greater significance is the percentage of income taken up by mortgage payments. Looking back at previous recessions, 1st time buyer mortgage payments reached 30% of gross income in the 1990’s. While mortgage interest rates may have peaked at 15.4%, income multipliers were lower then. The last decade has seen ever increasing income multiples, which did not in themselves cause a problem, because of the low interest rate environment. But now the proportion of income now required to service monthly mortgage payments is around 33%, 5% higher than pre-pandemic and close to the 34% that was true at the time of the global financial crisis in 2007-8. Any further mortgage rate increases will move affordability into dangerous territory, and a breaking point for many borrowers. Property repossessions are already beginning to increase, even before the affordability squeeze.

Holders of mortgage assets need to consider a growing trend where borrowers are utilising the Debt Respite Scheme (‘Breathing Space’) to delay repossessions. That scheme gives someone with problem debt the right to legal protection from their creditors. There are two schemes, both available to anyone with problem debt. Even the standard scheme provides legal protection from creditor action for up to 60 days and includes pausing enforcement action and freezing most interest and charges on debts.

Some lenders and holders of mortgage assets are surprised that these schemes can be implemented at the very last moment, sometimes on the day of possession, after a Court has issued a warrant and a bailiff arranged. Being realistic, such an intervention could add many months to the process, as for example, attempting to re-arrange bailiff appointments will not be allowed until after the Breathing Space protection expires. As a result of these schemes, workflows need to be updated – as do loss provision calculations. Sometimes the headlines focus on the effect on consumers, without considering the effect on lenders.

If you would like to discuss our recent experiences and chat about the impact on collections and repossessions processes give us a call.