64% increase in number of homes bought using ‘risky’ mortgages

There has been a 64% increase in new mortgage lending viewed as risky by the Bank of England in the last five years. 88,817 ‘risky’ new mortgages were taken out last year compared with 54,023 taken out in 2010*.

A total of 325,636 ‘risky’ mortgages - those lent at 4.5 times salary or above - were taken out across the UK in the last five years. Many of these borrowers could be in danger of seeing their homes repossessed, and becoming insolvent should interest rates increase.

New Bank of England rules state that these high loan-to-income mortgages cannot exceed 15% of the total number of new mortgages a lender agrees in each quarter. The measure was put in place partly to keep house price inflation in check, and reduce banks’ risk levels.

The Bank of England says that mortgages where the total amount lent is 4.5 times or more the borrower’s salary are higher risk, as borrowers are “more likely to encounter payment difficulties in the face of shocks to income and interest rates.”**

The biggest rise in the high loan-to-income mortgage lending in the UK was in South-East London (SE postcodes) which saw an 172% rise in the percentage of ‘risky’ new mortgages taken out, up from 1,211 in 2010 to 3,292 in 2014. Next was East London (E postcodes), up 150% from 1,080 in 2010 to 2,702 in 2014.

The increase might be driven by a house price boom in fashionable areas such as Shoreditch, Dalston, London Fields and Peckham, where locals’ salaries have failed to keep up with house price inflation as those areas become gentrified.

Only 11 out of 121 top level postcode areas saw a decrease in risky mortgages since 2010, with Belfast the largest city seeing a fall. There was a 39% fall in the number of 'risky' new mortgages extended in Belfast in the last five years, with 858 in 2014 compared to 1410 in 2010. The only city in England to see a fall was Lancaster.

Jeremy Willmont, Head of Restructuring and Insolvency says: “Hundreds of thousands of families have, in the view of the Bank of England, stretched themselves too far to buy a home. Nearly nine per cent of mortgages taken out in 2014 were classed as ‘risky’. This is up from just over seven per cent in 2013 and less than six per cent in 2010. Considering the Bank of England designed the Mortgage Market Review to throw sand in the engine of the market, this is an alarming trend.”

“Perhaps it is the expectation that interest rates will stay low for some time that is encouraging this risk hungry attitude amongst homeowners. The increase in the size of repayments that many will face will lead to some of those people struggling, and failing, to meet their obligations.

“If increasing numbers of borrowers continue to take out mortgages at these high loan to income ratios then the housing market could be storing up problems for the future.”

The number of ‘risky’ mortgages taken out each year has risen sharply.

The national average percentage of new mortgages taken out in each postcode area that are classified as ‘risky’ was 8.4% in 2014. Some areas have a much greater proportion:

  • South-West London - 4,180 ‘risky’ new mortgages in 2014, 22.5% of the total number. The highest percentage in the UK

  • North-West London - 1,469 ‘risky’ new mortgages. 21.8% of the total

  • West London - 1,646 ‘risky’ mortgages, 21.2% of the total
* Source: the Financial Conduct Authority. Annual figures calculated to 30 September in each year.

** Source: Bank of England | Financial Stability Report June 2014 | Issue No. 35


Jeremy Willmont