Jan 19 – The tide of debt

The recently published Sector Views from the Financial Conduct Authority sets out the evolving landscape of our mortgage market.  With 13.5million mortgage accounts outstanding and balances reaching almost £1.4trillion, this is a significant part of the UK economy.  Of particular note is the term of that debt.  Only 42% of first time buyers in 2007 had an initial term of over 25 years, but this extended to 65% in 2017.  What should concern us all is that 40% of all borrowers who took out a mortgage in 2007 will be over 65 when their mortgage matures.  This is cementing in longer working within the economy and greater amounts of interest being paid with less capital repayment in the early years of any loan.  This will make borrowers more susceptible to negative equity with any falls in property prices.  These issues are further exacerbated where the borrowers have benefited from Help to Buy.

The other pressure in the system is the loan to income ratio.   Around 28% of loans granted recently have an LTI ratio in excess of 4 times income.  10% are above the 4.5 times “control limit” imposed by the Bank of England at the behest of the Financial Policy Committee.  The controls imposed to date appear to have done little to stem this range of lending.  These are consumers who if they see pressure on their incomes or increases in the cost of borrowing may find it difficult to meet their repayments.

The FCA Financial Lives survey also sets out that it will only take a £400 increase in the costs of mortgage or rental payments for all households to reach the point of struggling to make their payments in full.  The pressure on this government to negotiate and deliver Brexit has meant that policies which might have helped the “Just About Managing” have been lost.

All the data indicates that the industry has used copious amounts of ingenuity to keep people borrowing to buy houses, making considered decisions to change the traditional boundaries encouraged by long term low interest rates and cheap money provided by government.  However, we are now at the end of that cycle and due to enter a new age.

It is likely that we will see a new swell in some consumers looking to access the equity in their property, before they reach the stage of using RIO or Equity Release.  The MMR identified that this was one of the core issues for UK consumers and lenders leading into the last crisis, and firms would be well advised to consider such shifts in policy carefully.  This is not an article to generate fear but to remind our sector to use our knowledge and skills to not repeat the mistakes of the past and retain a robust and healthy market which works well for the consumer.

Robert Sinclair
Jan 19