In a letter to the House of Commons Treasury select committee released earlier this week, the FCA chief executive Nikhil Rathi laid out the watchdog’s latest findings on home loan defaults, mortgage prisoners and dangerous cladding on flats.
It estimated 200,000 households had fallen behind on their home loans by last June, accounting for 2.4% of all regulated residential mortgages.
The watchdog added that a further 570,000 households are “at risk of payment shortfall” over the next two years, assuming that UK households suffer a 10% fall in income over this period due to cost-of-living pressures.
UK average wage growth is currently behind inflation, which is 10.7%, according to the Office for National Statistics.
If as many as 770,000 households did default, that would mean around 9% of the UK’s mortgages would be overdue.
The FCA defines a mortgage borrower that is “at risk of payment shortfall” as anyone that spends more than 30% of their gross household income on mortgage payments.
Turning to mortgage prisoners, Rathi estimated that 47,000 households in this position, out of 195,000 mortgages held in closed books with inactive firms following its review in the first half of 2021.
The FCA head wrote: “We focused on this group because the vast majority of mortgage prisoners have a mortgage from a firm that is no longer lending to new customers and most of these mortgages were sold before 2008/9.”
The body explains that risk appetites among lenders were tightening at this time, in the wake of the financial crisis, and left these mortgage holders unable to switch to cheaper loans because more recent criteria rules fall outside their loan, or, borrower characteristics.
It says its Modified Affordability Assessment, following its 2021 review, “reduced regulatory barriers” firms are required to use when deciding whether to offer new deals to these borrowers.
But it adds: “We should be clear that we cannot force any firm to lend to borrowers who fall outside their risk appetite.”
Last month, lenders said they would consider mortgage applications on flats in buildings in England over five storeys (or, 11 metres) from next month, according to a statement from key mortgage firms and the Royal Institution of Chartered Surveyors.
The move means that from 9 January lenders have agreed to grant mortgages when borrowers look to buy, sell, or remortgage flats impacted by cladding.
The watchdog told the Treasury committee that it does not have responsibility for the Building Safety Fund and EWS1 fire review forms at the heart of these changes. It says these lie with the Department for Levelling Up Housing and communities and industry bodies, respectively.
But FCA head Rathi added: “We will continue to closely monitor the mortgage market and we will take action where we see detriment that can be addressed within our powers.”
