As we approach our next Consumer Duty Services 'in person' event on 15 May 2024 in Manchester, I have looked at what comfort that mortgage holders with multiple unsecured debts can take from the recent news from the governor of the Bank of England, the mortgage arrears statistics from UK Finance and FCA Financial Lives survey results from January 2024.
Ken Doherty of Finvence presenting at the event on 27 March 2024 in Grantham
The treatment of equity in informal and formal debt remedies is very topical and The Insolvency Service will be joining forces with the Insolvency Practitioners Association (IPA) to look at the low proportion of homeowners in formal debt solutions like IVAs and a future approach to simplifying the treatment of equity.
Amongst the IVA volume providers, only 10% of cases are homeowners. DMPs for homeowners are typically much more protracted than for consumers that are tenants. Our series of events with regulators, creditors, debt solution providers and insolvency practitioners has explored why.
Recent data from StepChange and MoneyPlus has suggested that homeowner levels for those seeking debt advice are between 18% and 33%.
Background
The Bank of England held interest rates at 5.25% for the sixth time in a row with the next update on 20 June 2024. At its meeting ending on 8 May 2024, the MPC voted by a majority of 7–2 to maintain Bank Rate at 5.25%. Two members preferred to reduce Bank Rate by 0.25%, to 5%. Andrew Bailey has told the BBC that the UK economy had "turned a corner".
The interest rate set by the Bank dictates the rates set by High Street banks and money lenders. Rates are currently at their highest level for 16 years which has meant people are paying more to borrow money for things such as mortgages and loans.
Inflation is forecast to fall to the Bank's 2% target in the coming months and to 1.9% in 2026. We shall see. Despite this, high street mortgage rates are rising and credit card interest rates remain incredibly high (average 24.34%) with over 50% of cards holding a balance at January 2024.
The The Money Charity April 2024 statistics suggest that working families remain under significant financial pressure as they struggle to cover their most essential living costs, with family members of all ages increasingly aware of these challenges. Mortgages remain a considerable item of household expenditure. The estimated average outstanding mortgage for the 10.75m households with mortgage debt was £150,609 in February 2024. Click here to access the report
According to HM Land Registry, average house prices in the UK decreased by 0.2% in the year to February 2024 to £281,000.
Sebrina McCullough of Money Wellness commented on the Bank of England decision to hold interest rates, as we see many providers withdraw products and increase rates.
Comment on Bank of England statement by Money Wellness
New polling by YouGov for StepChange shows that 23% of UK mortgage holders have turned to some other form of credit or borrowing in the last 3 months so that they could keep up with existing borrowing commitments. Polling also revealed that 16% have borrowed on their credit card in the 3 three months so that they can keep up with other bills, a higher proportion than those living in other housing tenures. The Mortgage Charter is due for review by the FCA in June 2024. PS24/2 ('Borrowers in Financial Difficulty' - BiFD) is due for implementation in November 2024.
Richard Lane, Chief Client Officer at StepChange Debt Charity, said:
“There are still hundreds of thousands of people set to face this kind of payment shock this year – the problem hasn’t yet gone away. So, it’s crucial that Government continues to do everything possible to reduce the risk of people losing their homes as a result of mortgage rate hikes. This includes potentially extending the life of the Mortgage Charter, that goes above and beyond the normal forbearance measures already expected of mortgage lenders.”
With an estimated 1.5m households set to re-mortgage this year, National Debtline is warning that more mortgage holders are at risk of financial difficulty as they face a significant increase in monthly repayments.
UK Finance - Mortgage arrears and possessions Q1 2024
By contrast, the UK Finance latest arrears and possessions data shows a modest increase (3%) in homeowner mortgages in arrears to 96,580 in Q1 2024, compared with Q4 2023. This was driven by the continued impact of cost-of-living pressures and higher interest rates.
The overall proportion of mortgages in arrears remains low, at 1.11% of homeowner mortgages and 0.69% of BTL mortgages.
Financial Conduct Authority - Financial Lives survey January 2024
Mortgage holders were slightly less likely than the national average to be struggling in January 2024. 24% were not coping financially or were finding it difficult to cope. This compared with 28% of all UK adults.
5% had missed paying any domestic bills or credit commitments in the previous 6 months versus 11% of all UK adults. By comparison, in January 2023, 29% of mortgage holders were struggling to cope financially and 5% had missed bills in the previous 6 months.
More than 36% of mortgage holders had seen their mortgage payments increase in the previous 12 months. 1.7% had missed a mortgage payment in the previous 6 months, which wasn't statistically different from the 1.1% who had missed a payment in the 6 months to January 2023.
There was an increase in the proportion of mortgage holders struggling financially who have asked their provider to reduce their monthly payments or to provide a payment holiday. 0.4% did so in the 6 months to January 2023, rising to 1.6% in the 12 months to January 2024.
These numbers seem consistent with the UK Finance picture
Conclusions
At the next Consumer Duty Services event on 15 May, we explore the impact of regulatory interventions during the cost-of-living crisis and the deferred impact of 'coping strategies' for homeowners and other cohorts of consumers in problem debt.
The data-driven approach taken by Finvence in looking at debt advice and debt remedies going back to 2017 has highlighted key factors around the sustainability of products like an IVA.
Responsible voting behaviour may also have a major impact on the volume of homeowner cases presenting for debt remedies like an IVA, where current voting behaviour by creditor voting agents may result in protracted DMPs where the case is not taken forward to the proposal stage.
The simplification of the treatment of equity may also encourage more homeowners to consider the benefits of an IVA going forward.
The implementation of PS24/2 (BiFD) in November 2024 and PS24/3 (Product Sales Data) in 2025 will undoubtedly have an impact, as regulated creditors will need to report quarterly on accounts subject to a debt remedy.
The FCA is already undertaking surveys in May 2024 around Consumer Support and Vulnerability Management to selected firms. Assessments of consumer outcomes will become more granular. Poor outcomes for indebted homeowners will become more apparent, where changes to CONC 7 (arrears management handbook) look at the collection strategies deployed by creditors and their agents. The financial resilience of creditors and their agents are being tested to determine whether poor practices and outcomes are a result of out-of-date business models, conflicts of interest and/or low financial resilience.
Meanwhile, regulators and advertising standards are collaborating to improve the quality of financial promotions, consumer education and the quality of debt advice to assist in delivering sustainable debt remedies. The FCA review of CONC 8 (debt advice handbook) is imminent along with further sector surveys.
References
https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/may-2024
https://moneyadvicetrust.org/latest-news/pain-still-to-come-for-many-mortgage-holders-as-interest-rates-held/
https://www.stepchange.org/media-centre/press-releases/mortgage-holders-use-credit-arrears-rise.aspx
https://www.gov.uk/government/publications/mortgage-charter/mortgage-charter
https://www.ukfinance.org.uk/news-and-insight/press-release/mortgage-arrears-and-possessions-q1-2024
financial-lives-cost-of-living-jan-2024-recontact-survey-findings.pdf (fca.org.uk)