The number of people in arrears on their mortgage is expected to jump by 70 per cent between the end of 2022 and the end of 2025, as higher interest rates and household costs limit affordability.
There were a total of 81,200 people in arrears on their property in 2022. This is projected to rise to 137,800 by 2025, according to UK Finance.
The warning comes on the heels of 14 consecutive interest rate rises. Also known as the base rate, it affects mortgage rates and is now at 5.25 per cent.
As a result, many have been unable to afford soaring mortgage costs, with some moving from rates of just one per cent to highs of 6 per cent.
Despite rates now falling slightly, with brokers predicting mortgage rates of below 4 per cent to be available by early next year, those in arrears are still predicted to increase, according to UK Finance data.
This means that between the start of this year and the end of 2025, 56,660 more homeowners will fall into arrears and 2,000 people will see their homes repossessed.
It has been forecast there will be a 30 per cent rise – equivalent to 105,600 people – in the number of people falling behind on their monthly payments in 2023.
Laura Suter, director of personal finance at AJ Bell, said: “The outlook for the housing market is pretty bleak for next year: subdued transactions, lower lending and a large jump in arrears as people struggle to repay their debts.
“There isn’t much optimism that things will dramatically improve in 2025, even as interest rates hopefully start to drop, with arrears still climbing as people face the reality of a higher interest rate environment.”
The outlook for 2024 is one of continuing challenges in the mortgage market, but the main pressures on affordability look to be peaking now, UK Finance said.
The financial services company is predicting there will be a 22 per cent increase to those unable to meet payments in 2024, a total of 128,800 people, as well as a seven per cent hike in 2025.
Although many have fallen into arrears, repossessions remain low at just 4,400 taken into possession in 2023.
This is forecast to rise to 5,100 possessions in 2024. Although 16 per cent higher than 2023, it still means repossessions are lower than in any year from 2019 all the way back to 1981, when the mortgage market was a little over half its current size.
Suter added: “Arrears aren’t as high as they might have been in previous crisis periods. Unemployment remaining low means that people’s wages aren’t as much at risk, while more stringent stress testing means that many will find the increases in mortgage repayments are still affordable.”
UK Finance added that mortgage lending, including re-mortgaging, will reach £226bn in 2023, a 28 per cent decrease than in 2022.
Meanwhile, in 2024, it expects a further fall of 5 per cent.
Lending for new house purchases fell by 23 per cent in 2023 and is forecast to fall by a further 8 per cent in 2024.
James Tatch, head of analytics at UK Finance, said: “2023 was a challenging year for both prospective and existing mortgage borrowers, facing affordability pressures from higher interest rates and cost of-living, and house prices still at elevated levels relative to income. In the face of these challenges, borrowing for house purchase is constrained.
“With these pressures unlikely to ease significantly in the short term, we expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025.”
Much will depend on what will happen to interest rates in the new year. Although predicted to have three drops in 2024, this will depend on a number of factors including inflation.
While it has been dropping significantly in the past few months, to 4.6 per cent, it is still much higher than the Bank’s 2 per cent target.
Anyone who is struggling to pay their mortgage or thinks they will struggle in the near future should approach their lender as soon as possible. Homeowners can get help and guidance on your options without it impacting your credit file.