We have heard commentators starting to describe some mortgage portfolios as ‘toxic’. While that may sound a bit harsh, we can understand how they may have reached that conclusion. There is no doubt that many borrowers are struggling to service their debt and there is also no doubt that certain categories of product and/or criteria increase the risks of experiencing payment difficulties. The challenge for holders of mortgage assets is to identify mortgages that may be at greater risk of default and to manage them appropriately.
There are two particular areas of increased risk that we want to highlight in the current climate:
- Fixed rates borrowers coming to the end of their fixed term. Thousands of mortgages taken out over the past 5 years are due for renewal. Bank of England data suggests around 350,000 mortgages are coming off fixed rates each quarter. Those coming off two or three-year fixes will be in the habit of paying around 2.5%. Similar deals today are more likely to cost around 5.5%, with a potential doubling of monthly payments. Payment shock, broader cost of living increases and net of inflation reductions in income are all likely to result in increases in the number of defaults within a portfolio.
- Buy to let borrowers. Private landlords feel they have been under attack for some time now, especially as this tax year marks the fifth anniversary of the controversial buy to let tax relief changes, resulting in mortgage interest relief being reduced to zero over that time. Those landlords, with the majority coming off fixed rates, are beginning to feel significant pain. Those with high LTVs or poor rental coverage ratios are finding themselves in a precarious financial position. While rents may have increased over recent years, it is becoming almost impossible for landlords to impose rises in the current climate as renters are also hit by wider cost of living increases, resulting in a ‘double whammy’ for private landlords. For those with portfolios, the previously employed tactic of re-financing them regularly is becoming tougher too, as lenders review their risk appetites.
In the short term we can see no significant changes in the sector; everyone will share the pain. However, purchasers, holders and funders of mortgage portfolios need to assess the inherent risks by carrying out deep dive analysis of the loans within them. If you would like to discuss how we can help you identify risk in a portfolio, or just chat about current market conditions, give us a call.