Many cultures around the world regard the number seven as lucky, but that is unlikely to be the case at the offices of UK Finance.

Its most recent data for mortgage arrears and possessions — describing the fourth quarter of 2023 — shows a 7% increase for homeowner mortgages for the third time in a row. That brings the total number of houses in this unfortunate position to 93,680.

In addition to this bad news, the number of buy-to-let (BTL) properties classed as being in arrears rose by an eye-watering 18% on the quarter, totalling 13,570.

It won’t be plain sailing and there will be a few bumps, but I believe things will improve

Data for possessions is more mixed: numbering 540, homeowner properties taken into possession fell by 14%, while BTL properties in this situation increased by 11%, to 500.

Further context can be added through the UK government’s data for England and Wales, which was issued at the same time as the UK Finance figures (8 February). This shows that, while these numbers are going up, they don’t come close to the pre-Covid baseline. And possession claims for all mortgages peaked as far back as the period from April to June 2009, at 26,419.

Possession case types may have been increasing since the second quarter of 2021, the government report says, but “these are showing early signs of stabilising in the current quarter, although it is not yet known if this trend will continue”.

Xpress Mortgages director Rachel Lummis says: “The pain is being felt by more clients, with both the cost-of-living crisis and higher mortgage rates. It’s been brewing for some time, with things getting worse after the Mini-Budget.

If you think the only way out is selling your property, you’re better doing that yourself to maximise the price

“And it seems like this January, a month where we normally feel the pain after the Christmas spend and those tax bills landing, it’s hit some really hard. With depleted savings and little left after paying the mortgage and bills, it’s taking its toll.”

However, the government paper adds that, since 2008, the fall in the number of possession claims “has generally coincided with lower interest rates, a proactive approach from lenders… and other interventions”. Coming into the spring of 2024, we may be able to tick off the latter two of these at best.

‘Bubbling away’

“This is an issue that has been bubbling away since the infamous [Liz] Truss Mini-Budget,” says Orchard Financial Advisers managing director Ben Perks. “When rates rocketed, mortgage borrowers looking to renew their deals were impacted immediately.”

A “perfect storm” of surging living costs has made things even worse, adds Perks. Household budgets have been stretched to the extreme. With such pressure, it was only a matter of time before arrears figures started to rise.

We’re starting to see the BoE get a handle on inflation

This sentiment is echoed by Benham & Reeves director Marc von Grundherr, who adds that limited wage growth has also played a part.

Perks thinks things could get worse in the short term, pointing to debt charity StepChange’s recent report that found one in four mortgage holders had used credit to make monthly payments over the past year.

Separately, Octane Capital has data showing that internet searches for ‘mortgage repossessions’ increased by 49% on a monthly basis in October 2023, and by 88% across the whole year — although the lender notes that these figures come from a low base.

Some small landlords are selling up as the numbers just don’t work now

And a recent Bank of England (BoE) report on financial stability, which shows inflation continuing to be an issue, leads Wealthbrite founder and chief executive Carla Hoppe to describe the cost-of-living crisis as a “perma-crisis for many”.

She continues: “Some of the more concerning details in the report are that the proportion of take-home pay being spent on household costs will continue to rise in 2024. With more people opting for longer-term mortgages, the impact on their long-term financial stability may reverberate for years.”

Cause for hope?

However, Grundherr offers some hope, saying: “This trend is hopefully set to subside over the coming year.”

He explains: “We’re starting to see the BoE get a handle on inflation, and the general expectation is that, while the base rate will remain above 2%, a reduction is on the horizon.

“This should, in turn, cause mortgage rates to fall, which will help improve mortgage affordability across the board. We’ve also seen the introduction of the Mortgage Charter, which provides help, guidance and support to those struggling with their mortgage payments.”

The Mortgage Charter is a set of standards drawn up between the Treasury, the Financial Conduct Authority and some of the major mortgage lenders with the aim of helping distressed borrowers. It was put into action last summer.

With arrears and possession numbers below pre-pandemic levels despite their respective quarterly rises, it could be argued that the charter has been a success so far.

The pain is being felt by more clients, with both the cost-of-living crisis and higher mortgage rates

Perks says: “[The Mortgage Charter] has given many struggling borrowers the option to reduce payments for a six-month period and lenders have shown leniency during this extraordinary time.

However, he warns: “As borrowers come to the end of [these] arrangements and revert to higher payments, I fear we could see an increase in arrears and repossessions.

“We will find out in the coming months if the Mortgage Charter gave people the breathing space they needed to adapt to higher costs and make better arrangements. Or has it just given a six-month delay to the inevitable?”

Perks does add that, long term, he is much more positive than his initial assessment of the situation may suggest.

“The trajectory of interest rates is widely expected to go downward, and the cost-of-living crisis shows signs of easing. So, I hope to see the situation improve and that to be reflected in the mortgage arrears figures. It won’t be plain sailing and there will be a few bumps along the way, but I believe things will improve.”

Buy-to-let worries

The BTL sector should not be ignored.

“It’s this core segment of the market that poses the greatest problem for the mortgage sector, purely due to the superior volume of business seen on an annual basis,” notes Grundherr.

It’s not surprising that the BTL space has suffered more, says Perks.

He explains: “The interest rates available to landlords have been slightly higher and fees on products have been very unattractive. Unfortunately, as we see landlords struggling to pay monthly mortgage payments, it’s likely to result in increasing rents. So, the increased rates are impacting not only property owners but renters also.”

I hope to see the situation improve and that to be reflected in the mortgage arrears figures

And, while homeowners may get a reprieve in the near future, this is less likely to be the case for landlords. For example, the government scrapped its energy performance certificate targets for rented homes last September, but a recent survey by Foundation Home Loans shows four out of five landlords expect the next parliament to reinstate these targets.

Further difficulties and costs for landlords may be absorbed by the market for now — the latest government index of private housing rental prices shows a 6.2% rise in prices in the year to January 2024. And this takes place as, according to the Royal Institution of Chartered Surveyors’ January 2024 survey, tenant demand continued to grow in the three months before the report, while new landlord instructions once again dropped off.

The trajectory of interest rates is widely expected to go downward

But questions must be asked over how sustainable this supply-and-demand imbalance is, as well as what happens if market forces do lead to a flattening of rental increases while the costs of running a BTL business go up.

“We have seen landlords struggle as they come to the end of low fixed rates,” says Lummis. “In some cases the new mortgage payments are higher than the rental income, so some have to top up the payment from their personal income.

“Some small landlords are selling up as the numbers just don’t work now.”

Take the money and run?

Since Covid, concepts such as payment holidays, extended mortgage terms, interest-only mortgages and even the Mortgage Charter have become common parlance.

Every broker knows they should tell any client who is even starting to worry about arrears that they should come straight to them for advice.

Has the Mortgage Charter provided breathing space or just delayed the inevitable?

And, by now, every borrower surely knows that their lender doesn’t want to see them go into arrears.

But Octane Capital chief executive Jonathan Samuels has a piece of sobering guidance for those whose lender can offer no more solutions.

“If you think the only way out is selling your property,” he says, “you’re better doing that yourself to maximise the price rather than going down the route of a repossession.”

Whatever happens, lenders, brokers and everybody else involved in the mortgage market will have to become more approachable, understanding and flexible than ever.