Mortgage arrears increase by 23.3% hitting post-financial crisis high

1st November 2023

Gobal credit intelligence company, Pepper Advantage has reported a 23.3% annual increase in the arrears rate in the third quarter of 2023 to reach a new post-Financial Crisis high.

The growth in the arrears rate follows successive increases in the percentage of mortgages that experienced a Direct Debit Rejection (DDR), where a direct debit instruction is processed by a creditor but there are insufficient funds in the borrower’s account. The Q3 DDR rate grew 19.3% year-on-year, a smaller increase than the 33.3% annual figure recorded in April 2023, documented in Pepper Advantage’s previous report.

Pepper Advantage expects macroeconomic pressure on borrowers to continue to impact arrears in the fourth quarter and into next year. This assessment was echoed in the Bank of England’s latest Credit Conditions Survey, which forecast defaults to increase in Q4. This is partly due to the central bank’s estimation that only 20-25% of the impact of interest rate rises has filtered through into the economy. 

These warnings come at a time when UK households have record quantities of unpaid essential bills, depleted savings and an increasing proportion of disposable income spent on mortgage repayments. Pepper Advantage’s own data underlines the challenges borrowers are facing. The fact that the DDR rate is still increasing – albeit less acutely – indicates that the growth in arrears has not yet peaked.

The research showed that the rate of fixed rate mortgages in arrears grew 15.5% quarter-on-quarter and 53.7% year-on-year, but it is important to note these are off a low base and the absolute percentage of fixed rate arrears remains small.

The rate of variable mortgages in arrears, however, grew 5.6% quarter-on-quarter and 29.1% year-on-year off a much higher base with nearly one in four variable rate mortgages in Pepper Advantage’s portfolio is currently in arrears.

Buy-to-Let mortgages, a historically stable product, are beginning to show signs of stress, with the arrears rate growing marginally quarter-on-quarter off a very low base.  By comparison, the percentage of residential mortgages in arrears grew 7.0% off a higher base.

The regions with the highest absolute rate of arrears are the North East, Yorkshire and Humberside, and the North West, which had arrears rates that ranged between 9% and 11% in Q3 2023. The South East, South West and Greater London had the lowest arrears rates in the UK, each around 5-6%.

Arrears grew between 0.3 and 0.6 percentage points across all age groups quarter-on-quarter. Those aged 51-60 and 60+ showed the highest level of arrears.

Gerry McHugh, Chief Executive Officer, Pepper Advantage UK, said “We are supporting customers during this difficult time as the increasing cost-of-living, reduced household savings and rising interest rates combine to put pressure on borrowers. Unfortunately, we expect the situation to get worse before it gets better. Our real-time credit intelligence gives us and our clients the information to provide appropriate support to the borrowers who need it, including measures such as interest rate reductions or extending mortgage term lengths.”