While mortgage holders are still managing to cope, more financial stress is expected in the coming months, a committee of MPs heard as mortgage costs hit a 15-year-high.
MPs on the Treasury Committee were also told that there may be a shortage of landlords amid rising costs and housing shortages.
It came as MPs questioned lenders on how mortgage borrowers are coping with rising costs.
Henry Jordan, home commercial director at Nationwide, one of the top three lenders in the UK, told the Treasury Committee that new mortgages are costing around an additional £235 per month.
But lenders said they currently don’t see a notable increase in arrears.
Nationwide saw a 1 percent increase in the number of customers missing three months of payment during the past year, MPs heard. Arrear rates have also remained stable at Lloyds, Skipton, Santander, and Paragon.
Charlotte Harrison, interim CEO (Home Financing) at Skipton Building Society, said life events, such as illness or unemployment, is still the main reason mortgage borrowers get into financial stress, not higher interest rate.
Bradley Fordham, mortgage director at Santander UK, told MPs that lenders have stress-tested most mortgage borrowers’ affordability at the time of application to make sure they could withstand a higher interest rate of around 6 percent.
New home-buyers are facing more stringent affordability stress tests as interest rates rose, Mr. Fordham said.
“Lenders will be stressing at this moment in time somewhere between eight and nine percent pay rate to ensure that customers have future affordability,” he added.
Andrew Asaam, homes director at Lloyds Banking Group, told MPs that a low unemployment rate means most people still have options to manage “challenging” costs.
Ms. Harrison said she believes the higher interest rate environment will bring “more financial stress than we have done to date. She also noted that the stress will be spread and felt differently across households and that ”options are available to those customers as well.”
Major mortgage lenders signed a “mortgage charter” last month, promising to offer tailored support to struggling mortgage holders such as extending their term to reduce payment, payment deferral, or a switch to interest-only payments.
While the measures have already been available at many lenders, borrowers can now ask for support without having their credit file affected.
Rental Market Stress
Nigel Terrington, chief executive at Paragon Banking Group, which specialises in buy-to-let mortgages, warned that they “might be a shortage of landlords.”Mr. Terrington the buy-to-let sector has the capacity to absorb higher interest rates as landlords are stress-tested at around 200 percent rent-to-debt service coverage ratio, but rising costs have made it “a less attractive investment.”
Besides the cost of running a rental property, a rule change in 2015 meant many landlords are “taxed largely on the revenue they receive rather than the profit,” he said.
“And in addition to that, there’s a 3 percent stamp duty surcharge which is a disincentive to buy. So the landlord’s costs have gone up, and it has become a less attractive investment as a consequence.”
He also said landlords face another barrier of having to deal with “169 different forms of regulation and legislation.”
Mr. Terrington disputed the claims that buy-to-let mortgages are riskier for lenders and said there’s “plenty of capital available” to support the industry.
“I think if anything, there might be a shortage of landlords,” he said.
