“For those that own a house with a mortgage who bought post-2008 but haven’t traded since, outstanding debt will be negligible versus the uplift they’ve experienced since,” said Fatica.
“But those who have borrowed for lifestyle purchases, large extensions to their own homes, might be feeling the pinch.”
Stressing second charge mortgages
One product borrowers tend to take out for lifestyle purchases is a second charge mortgage. These are secured loans on a property from a second lender - not the original lender.
“They're an alternative way to raise money, usually for home improvements or extensions of a property - they can be used for debt consolidation too,” managing director of PFEP Wealth Management, Richard Bishop, explained.
They can also be used to release equity by parents to help their kids onto the housing ladder.
“The main reason is if the client has redemption penalties [early repayment charges] and they want to raise capital, so they use a second charge mortgage and then remortgage both loans into one at the end of the redemption term.”
The interest rate on these products tends to be around 2 or 3 per cent over the average mortgage rate, reflecting the additional risk.
MortgageKey founder and former City trader, Oliver Laver, told FTAdviser that when stressing a customers’ future mortgage affordability - for example, the customer is paying 1.3 per cent on their current mortgage and is fixed in for a further 12-24 months - the second charge mortgage lenders will stress the mortgage at 5 or 6 per cent.
“These new mortgage rates are causing havoc with affordability for new second charge mortgages,” Laver explained.
In the event of a customer struggling with their mortgage, Laver said lenders will likely treat every case individually.
“I know they would offer a payment holiday to begin with. Secondly, they would make a payment plan for the arrears and ask them to carry on paying,” he explained.
“So if the mortgage was £500 per month and they missed three monthly payments, so arrears total £1,500, they would perhaps ask for this over 12 months - which would be £125 per month plus the original £500 per month.”
Failing this, he said lenders would encourage the customer to sell the property and down-size or move into rental accommodation.
Over leveraged loans & high loan-to-value
While some lenders may recommend borrowers sell their property, this might not be the best option in the current market - one where house price growth has fallen for three months running and is set to correct itself by anywhere between 5 and 15 per cent.
“Where there becomes an issue is the people who are over leveraged and took out mortgages at 90 or 95 per cent loan-to-value,” Laver added.
