Mortgage balances with arrears jumped by 13% in the second quarter of the year to the highest level since 2016, according to Bank of England figures that underscore the stress in the UK mortgage market.

Rising interest rates and unemployment over recent months have put pressure on household disposable incomes, forcing some families to cut or suspend their monthly mortgage payments.

Buy-to-let mortgage payers have also come under pressure in parts of the country where tenants are struggling with the cost of living crisis.

The Bank of England said the total value of mortgage balances which had some arrears rose to £16.9bn, up by 29% on the previous year and the highest since the third quarter of 2016.

Mortgage arrears are based on figures showing the number of borrowers failing to make payments equivalent to at least 1.5% of the outstanding mortgage balance or where the property is in possession.

Mortgage lending was also hit in the second quarter with gross advances falling by £6.3bn to £52.4bn. Year on year, mortgage lending slumped by almost a third, to the lowest level since the worst of the Covid-19 collapse in lending in the second quarter of 2020.

Lewis Shaw, founder of Mansfield-based Shaw Financial Services, told the news agency Newspage a “mortgage meltdown” is approaching, unless the Bank of England changes its approach.

Shaw said: “The speed at which mortgage arrears are increasing is terrifying and should give cause to pause at the next Bank of England interest rate meeting. This is dire data, and we know that it’s about to get an awful lot worse with 1.6m mortgage holders due to renew over the next 12 months at significantly higher rates than anyone has been used to for well over a decade.”

Simon Gammon, managing partner at the finance arm of estate agents Knight Frank, said the proportion of mortgage payers falling behind with payments remained low at just 1%, despite the “sizeable jump in arrears”.

He said: “That’s because the vast majority of outstanding mortgages were issued under the post-global financial crisis regime, which was much more stringent when it comes to affordability.”

However, while homeowners were more likely to make cuts to other spending before falling behind with mortgage payments, buy-to-let landlords may take a different view, he said.

“We are more likely to see arrears in the buy-to-let sector, where landlords face a unique set of challenges. If a landlord finds their mortgage is no longer affordable, or the rent no longer covers their outgoings, they only have two choices – sell or default. If they opt to sell, they may have to wait up to a year for the tenancy to end, unless they are willing to sell with a tenancy in place, which is more difficult.

“Landlords are also more likely to opt to default than those struggling with a mortgage secured against their main residence, so this is an area to watch,” he added.

Incoming Bank of England deputy governor Sarah Breeden said she agreed with her future colleagues on the monetary policy committee (MPC), which sets UK interest rates, that inflation may fall at a slower pace next year than expected, forcing the central bank to keep the cost of borrowing higher for longer than expected.

Breeden, who will replace Jon Cunliffe as the Bank’s deputy governor for financial stability after the MPC’s meeting next week, said there was also a risk that growth and unemployment will worsen.

“I will, after November, be very careful in balancing those two factors: the risk of inflation becoming embedded through more persistent, second-round effects, as well as the impact of tightening coming through,” she told parliament’s Treasury Committee in a hearing convened to approve to her appointment.

“The challenge right now is that wages are high and rising and there is a real risk that second-round effects means that this inflation becomes embedded,” she said, adding that in keeping a lid on inflation, “it is not our intention to cause a recession”.

The MPC is expected to raise interest rates by a quarter point to 5.5% on 21 September, raising the average mortgage payments by £3,000 a year for a household that refinances a 2-year fixed product.

Breeden said she expected inflation to be “around the [Bank of England’s] 2% target in two years’ time”.

• This article was amended on 13 September 2023. An earlier version said that mortgage arrears had risen 13% to £16.9bn. In fact this is the value of outstanding mortgage balances on which there are some arrears. The value of the arrears themselves rose to £1.9bn, an increase of 5.5%.


Phillip Inman

The GuardianTramp

Related Content

Article image
Kwarteng considers extending mortgage guarantee scheme
Initiative may continue beyond December as bank bosses raise concerns over mortgage market

Kalyeena Makortoff and Rupert Jones

06, Oct, 2022 @4:15 PM

Article image
More than 40% of mortgages withdrawn as market reels after mini-budget
Lenders began pulling products on Monday as they struggled to price products amid financial uncertainty

Phillip Inman

29, Sep, 2022 @1:23 PM

Article image
‘Lots of us are very anxious’: why Britain’s buy-to-let landlords are selling
UK rent and rate rises plus tougher rules are fuelling a crisis for both tenants and owners

Sarah Marsh

24, Feb, 2023 @12:30 PM

Article image
UK’s 13-year housing market boom to end in 2023, surveyors predict
RICS report says rise in repossessions will add to supply while soaring interest rates price buyers out of market

Mark Sweney

12, Oct, 2022 @11:01 PM

Article image
UK mortgage approvals rise despite surge in borrowing rates
Surprise jump in demand for home loans as borrowers ‘scramble’ to get ahead of interest rate increases

Larry Elliott Economics editor

31, Jul, 2023 @11:04 AM

Article image
Bank of England interest rate rise – what it means for borrowers and savers
Rate rise to 3.5% affects everything from mortgages to credit cards, loans and savings. Here is all you need to know

Rupert Jones

15, Dec, 2022 @1:27 PM

Article image
UK house prices flatlining as mortgage rates rise, says Nationwide
Lender says slowdown will intensify in coming months as household budgets come under more pressure

Mark Sweney

30, Sep, 2022 @10:41 AM

Article image
UK mortgage approvals fall to five-month low as rate hikes hit demand
July is traditionally busy month for home buying but surge in interest rates has begun to ‘take its toll’

Larry Elliott Economics editor

30, Aug, 2023 @11:38 AM

Article image
New mortgage deal falls below 5% in ‘watershed moment’ for UK homeowners
Nationwide’s two-year fixed rate deal offered at 4.99% as lenders jostle for customers

Rupert Jones

09, Nov, 2023 @10:32 AM

Article image
What steps could government take to help mortgage borrowers?
As interest rates rise, cash-strapped households need speedy solutions to meet monthly payments

Hilary Osborne

16, Jun, 2023 @5:00 AM