There are fears that the UK will see a pick-up in home redemptions if interest rates continue to rise steadily after it was revealed that the key interest rate had risen by a further 0.5% to 2.25%.
A combination of high house prices, soaring energy and food bills, and near double-digit inflation is driving interest rates higher, leaving more homeowners unable to pay their mortgages.
Foreclosures, a legal process by which a lender or secured loan provider becomes the owner of a property, have already seen significant growth this year.
While redemption is a last resort, the numbers seem to suggest that the higher interest rates go, the more likely it is.
According to the latest government statistics from April to June 2022, home foreclosures increased during the last rate hike cycle compared to the same quarter of 2021.
It showed mortgage tenure claims from lenders up 39 percent, district court orders for possession up 496 percent, warrants requested by the lender up 361 percent, and attachments by district court bailiffs increased by a whopping 1,611 percent.
To put the increase in context, there were only 10 foreclosures in the entirety of last year from April 2020 to March 2021.
However, it is important to note that the numbers are somewhat skewed by the pandemic, as bailiff enforcement restrictions were put in place but ended on May 31, 2021. They are now working on clearing backlogs.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Mortgage rates have risen to levels not seen in a while, marking the end of the cheap home loan era.
“As households also face unprecedented cost pressures from all sides and interest rates continue to climb to stem rampant inflation, the harsh reality is that the number of people losing their homes when they default is likely to increase becomes.”
Karen Noye, mortgage expert at Quilter, said the faster the base rate goes up, the more likely it is that more homes will be taken over.
“Historically we know that in the UK when the Bank of England interest rate hit about 7 per cent in 1998 we saw a garnishment rate of about £34,000 a year.
“The big difference is that interest rates had gradually increased over several years over this period, after hovering around the 5-6 percent mark before rising to 7 percent in 1998.
“This time around we appear to be on a rapid uptrend that could shake people’s finances even more and we could potentially see a spike in redemptions as a result.”
There is concern that the increase in garnishments could be “the tip of the iceberg” as Britain heads into the winter and bills soar higher.
Ms Noye added: “For those who have recently exited a fixed rate mortgage deal or have tracker deals, they are also likely to experience increased mortgage costs. Combined, energy bills, high grocery prices, and rising mortgage costs might be enough to force someone into mortgage arrears. Ultimately, this may result in a withdrawal.”
However, some have suggested that while there could be a surge, redemptions are still fairly unlikely to become a recurring event as lenders will only do so as a last resort.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said it takes a “material material change of circumstances” to repossess a person’s home which lasts for a substantial period of time.
“This could be triggered by inflation pushing a mortgage out of reach, but it’s far more likely that someone will be out of work for an extended period. At the moment employment is robust and there are many vacancies so things will likely only change if we get a recession that has a significant impact on job security.”
Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, added: “While the number of homeowners defaulting on their mortgage payments is increasing, the numbers are still low compared to 2019. “
Although we are not yet seeing a major surge in withdrawals, suggesting that there has not been a massive surge yet, this is expected to increase in the coming months.
Ms Haine added: “While mortgage repayments are generally the last form of credit that a borrower will default on, knowing that doing so will put them at risk of losing their home, it is given the multiple challenges homeowners are currently facing face likely that garnishments will increase in the coming months as the reality of higher mortgage costs plunges people into deep financial distress.”
Homeowners struggling with their bills are urged to speak to their lender before things get out of hand.
They may be able to put you on a payment plan that will help you avoid a situation where your home is repossessed. In addition, there are also debt relief charities that can offer advice on how to budget effectively and the order in which to pay off your debt.
Ms Coles added: “If you’re worried about not being able to pay the mortgage, the sooner you contact your lender the better. You have a duty to step in and help when you run into real trouble and consider all possible options to help you keep track of your payments. It’s not an easy decision, but it’s much better to tackle it before the arrears start to build up.”