The high-risk mortgage bubble has continued to grow, as another 71,273 mortgages viewed as ‘risky’ by the Bank of England were taken out in the UK in just a year*.
Bank of England guidance says that mortgages are considered risky if they are lent at 4.5 times or more than salary. Those people who take out risky mortgages are in danger of repossession of their homes or even insolvency should they not be able to make repayments.
With interest rates remaining low, homeowners might be being lulled into a false sense of security. Any future interest rate increases could see a heightened risk of homeowners not being able to make repayments, especially for those with variable-rate mortgages or short-term fixes.
According to our research, six out of the top 10 areas that took out the highest numbers of risky mortgages in the last year were in south west London, with Wandsworth (1st
), Wimbledon (5th
), and Clapham (6th
) among the national hotspots out of 1,567 areas. Of the top 20 locations for high-risk mortgages, the majority were in Greater London, with Brighton & Hove representing a hotspot outside the capital.
The increase of ‘risky’ mortgages in London could be driven by salaries struggling to keep up with rising house prices. As a result, homeowners might be over-extending themselves to buy their desired property by taking out mortgages at ever higher multiples of their salaries.
By taking out high loan-to-income mortgages, homeowners themselves are contributing to rising prices in London. A steady influx of young professionals into the capital has also contributed to house price rises.
The figures are particularly concerning given that the Bank of England introduced measures in 2014 to tighten controls to reduce the number of risky mortgages taken out. These included the strengthening of rules around interest-only mortgages and stricter background checks on affordability.
Jeremy Willmont, Head of Restructuring & Insolvency, says: “Despite preventative measures being put in place to calm the market, homeowners taking on too much risk with their mortgages is still a real problem".
“Homeowners might be becoming too comfortable with the low interest rates at the moment".
“Some homeowners are stretched even with interest rates at their current record low, so an increase of just half a percentage point would represent a significant relative jump in mortgage repayments. Rising interest rates carry the ultimate threat of bankruptcy for overstretched borrowers".
“Young professionals are overstretching themselves to buy homes in new London hotspots such as Brixton and Clapham. Too many ignore the possibility of a decline in house prices or that their salaries will not rise faster than inflation".
“Homeowners with demanding mortgage repayments need their salaries to keep up with any potential interest rate increases - otherwise repossession and insolvency become real dangers.
“The Bank of England will be keeping an eye on these figures and might be concerned - particularly after they brought in measures to try to control risky lending in 2014”.
14 of the top 20 areas with the highest number of ‘risky’ mortgages taken out in Greater London
||Number of ‘risky’ mortgages taken out in the last year
||Number of ‘risky’ mortgages taken out in the Top 20 areas
||Total Number of ‘risky’ mortgages taken out in the UK
*Year end- Dec 31 2015, latest possible data available