Goldilocks and the forbears

Rating agency Moody’s says borrowers are weathering the downturn much better than they did in the early 1990s but experts warn some of the factors that have helped them so far might weaken in the coming year.

In a report published this month, Moody’s says borrower performance has been better than during the 1990-93 downturn despite the UK being in the midst of the worst economic downturn since the 1930s.

The last downturn was shorter-lived – 40 months, compared with 45 months so far in this dip – and not as deep as now but arrears levels are currently significantly lower than in the early 1990s.

Data from Moody’s shows the proportion of all loans in six to 12 months arrears peaked at 2 per cent in the second half of 1992 compared with a peak of around 0.8 per cent in the first half of 2009.

A key factor that is helping borrowers keep up with their mortgage payments is low interest rates. Bank rate has been at 0.5 per cent for 34 months and Libor, the rate at which banks lend to each other, is at 1.08 per cent.

During 1990-93, bank rate fluctuated between 5 per cent and 13.88 per cent while Libor ranged from 6 per cent to 15 per cent.

Capital Economics chief property economist Ed Stansfield says the Bank of England has helped borrowers by lowering rates much quicker in this downturn.

He says: “In the 1990s, interest rates were still rising because of the constraints imposed by our membership of the exchange rate mechanism, meaning changes did not occur until about 18 months to two years after house prices started to fall.

“It was early 2008 when house prices started to fall and rates were lowered quickly after that, so there was a much bigger policy response this time, which gave borrowers massive protection.”

Moody’s predicts bank rate will stay at 0.5 per cent until the second quarter of 2013, which it says will continue to help mortgage borrowers.

But Lentune Mortgage Consultancy director Stuart Gregory is worried that the eurozone sovereign debt crisis could catch out borrowers who do not review their mortgage soon, forcing them to pay higher rates in the future.

He says: “If borrowers wait another 18 months or so and the eurozone crisis drags on, who knows where we will be with mortgage pricing? That is the danger. Borrowers need to look at their mortgage now or face a spike in their payments.”

Moody’s also points to the flexibility and increased numbers of mortgage products available to borrowers today as another factor helping people avoid trouble
Figures from shows there were 152 mortgages available in March 1991 whereas today there are over 3,200 available, meaning borrowers are more likely to find a product which will provide flexibility.

The price of mortgages is also vastly different, with the average standard variable rate at 14.64 per cent in March 1991 compared with 4.8 per cent today. The average loan to value ration of all mortgages was 92 per cent in 1991 compared with 76 per cent today.

Moneyfacts spokesman Darren Cook says: “Mort-gage rates were over 10 er cent back in the early 1990s and base rate was almost 14 per cent. The loan to values were a bit higher than they are today but the problem then was affordability, so you had people losing their homes because they could not afford them.”

Unemployment rates have risen during this downturn, from around 5 per cent to just over 8 per cent. In the early 1990s, unemployment peaked at around 11 per cent.

Capital Economics chief property economist Ed Stansfield says: “The labour market has been far more flexible this time round. We have seen workers accepting pay freezes in a way that did not happen in the early 1990s.

“We are also now getting to the stage where the unemployment rate has gone up more but a lot of this is down to youth unemployment rather than people in their 40s or 50s, who are more likely to have mortgages.”

But Moody’s warns that unemployment will rise in the coming year. The report says: “We expect unemployment rates to rise to 8.5 per cent in 2012 from 8 per cent in 2011. At the same time, wage growth will remain weak and household finances will come under more pressure in 2012 than in 2011.”

Council of Mortgage Lenders head of member and external relations Sue Anderson says lenders have been more flexible with borrowers struggling to meet repayments.

She says: “Forbearance is a key reason why the repossession rate during this downturn has been so much lower than in the 1990s, supported by the fact that low interest rates mean arrears accumulate far less rapidly than when rates are high, as they were in the early 1990s.”

But Stansfield warns all these factors are subject to what happens in the eurozone. He says: “The big risk facing the UK mortgage market really is what stems from Europe.”