Make no mistake... this is no repeat of 2008

Lucy Waters - Managing Director, Aria Finance

It's human nature to make comparisons with the past. That perhaps explains why there are an increasing number of news articles warning of a 2008-style wave of repossessions. The mounting concern is understandable: homeowners are being hit by a toxic combination of rising interest rates and decades-high inflation.

However, comparing the current market with the 2008 property crash - or any other, for that matter - is neither helpful nor accurate.

For a start, we haven't seen anything in the numbers to suggest that borrowers are about to hand their keys back to lenders in their droves.

UK Finance data shows that, during the peak of the Global Financial Crisis in 2009, around 48,900 homes were repossessed. Last year there were just 3,920, although the trade body expects this to rise to 7,300 this year, which makes sense given the squeeze on household incomes since interest rates started the rapid climb following the mini-Budget.

That's a large year-on-year jump, but to put it into context, the average number of homes taken into possession each year over the past decade stands at just under 9,900.

Tighter regulation

You may be reading this and thinking 'ah yes, but the worst pain is to come'. And yes, in all likelihood we will see more people slip into arrears, and unfortunately lose their homes.

It's also true that many borrowers will need to moderate their spending to keep on top of their mortgage repayments.

However, there are a number of regulatory and economic reasons why the number of repossessions will likely be far lower during the current market downturn.

First, we must remember that today's market is very different - and much more tightly regulated - compared with the one in 2008. Back then, borrowers could obtain 100% mortgage without having to prove their income. By comparison, is much more difficult to obtain a mortgage these days.

In fact, until August last year, borrowers were stress-tested to ensure they could withstand a sharp rise in interest rates.

The stress testing regime meant lenders had to check if borrowers could afford a mortgage rate equal to the lender's standard variable rate (SVR) plus three percentage points.

Data from Moneyfactscompare.co.uk reveals the average SVR in July last year - just before the stress testing requirement was scrapped - was 5.06%. That means until last lenders had to ensure borrowers could withstand a mortgage rate of at least 8%. Given the average 5-year fixed rate is currently around 6%, there is plenty of wiggle room.

Clearly, there will be a portion of borrowers on ultra-low fixed rates who face a significant jump in their repayments, putting their finances under intense pressure. 

However, the affordability checks employed by lenders are far more robust than the income multipliers that they used prior to the financial crisis.

Disposable income 

It is often said that borrowers these days are mortgaged up to their eyeballs, meaning that higher interest rates will hurt them disproportionately compared with previous generations. 

However, since 2014 lenders have been forced to cap the number of loans with a loan-to-income (LTI) of 4.5% at no more than 15% of new lending to ensure people do not become overindebted.

In reality, we find that most borrowers do not borrow the absolute maximum available to them so that they have some spare disposable income to save or to tap into in case of emergencies. 

Financial resilience

The strength of the regulatory system is one reason why I believe repossessions won't soar like they did in previous crises. Another is that by and large, households are more financially resilient than they were in the run-up to 2008.

Unemployment is exceptionally low by historical standards, and there are currently far more vacancies than workers. That makes it not only easier for borrowers to find work but also to force their employer's hands for pay rises. 

UK households have also accumulated nearly £1.1trn in easy-access and notice deposit accounts, much of which has been built up since the first lockdown, according to UK Finance. This is important as it means many borrowers have reserves to see them through the current cost-of-living crisis. 

Let's also not forget that, while around 1.8 million borrowers will see their fixed rate mortgage exp[ire in the next 12 months, millions more are sitting on cheap medium or long-term fixed rates.

There is also a lot of political will and determination to ensure that repossessions do not spiral in the same way they did in 2008 or the 1991 housing crash.

Just last month, the Government announced its Mortgage Charter - a raft of measures to help struggling borrowers, including a 12-month grace period on repossessions. 

Don't panic 

I am not trying to downplay the seriousness of the situation we find ourselves in - far from it. However, the point I am trying to make is that the market is in a very different shape than it was in previous crises.

There will, of course, be borrowers who will lose their homes in the current downturn - and each and every one of those will be an individual tragedy.

But to suggest we are returning to 2008 or even 1991 risks causing undue panic at a time when borrowers simply don't need it.

The Intermediary - July 2023, pp.56-57