UK Insights: Not 2008’s mortgage market 

Pepper Advantage is headquartered in the UK, where inflation, the rising cost of living, and interest rate rises dominate headlines, and borrowers are worried. Our call centres reflect the scale of this worry – we’re seeing more mortgage holders contacting us with concerns about what rising rates might mean for them. Many express fears that their homes could even be repossessed. 

I want to take an opportunity to address those fears here and help people understand what is happening and why; what has changed since 2008 (the last time UK interest rates were 5%); and most importantly, what we can do. First, let’s unpack (briefly) what happened in the UK: 

• As in many countries, a post-Covid surge in consumer-led spending resulted in the cost of goods and services ramping up as lockdowns ended.  
  
  
• Lockdowns brought two additional factors into play: 1.) people had more money at their disposal as we spent less during Covid, and 2.) the labour market tightened as more people left employment.  
  
  
• Regardless of political views, Brexit affected the UK’s supply chains, particularly food and other imported goods, increasing costs as demand began outstripping supply.  
  
  
• The war in Ukraine rapidly increased energy costs as people began moving back to cities, meanings the cost of buying, renting, and heating/powering properties grew significantly and simultaneously – leading to inflation.  
  
  
• Then, unique to the UK, borrowing costs spiraled dramatically in the Autumn of 2022 following the short-lived mini-Budget. 
  
  
• Meanwhile, inflation kept climbing as a combination of the above factors kept playing out.  
  
  
• Things came to a head in June 2023, when the Bank of England hiked interest rates to 5% in an attempt to get inflation under control. To put this into context, UK mortgage holders who come off fixed rates are looking at refinancing from rates of 1-3% to rates in the 7-9% (or higher) range. 

Why am I breaking this down in such detail? Because we are in the business of managing and analysing credit, and it is our job to help borrowers navigate this environment. It is therefore essential for us and our borrowers to understand it.

Next, it is important to point out that this is not a repeat of 2008. The mortgage industry has evolved considerably since the financial crisis, especially when it comes to dealing with customers in arrears. Underwriting standards have substantially improved, meaning wider mortgage portfolios are more resilient, and regulation has changed dramatically, with new Consumer Duty principles coming into force at the end of July. These principles will require companies to act in a way that delivers customer-centric outcomes.

Technology has also progressed significantly over the last 15 years. I cannot stress enough how the changes in technology are transforming how the industry engages with customers. Better data allows us to get a more complete understanding of our borrowers as individuals at an earlier stage than ever before, and more advanced technology allows us to use this understanding to develop better methods to engage with and help them in a way that helps them feel supported. The result is that there is now a greater capacity to find more sustainable solutions for borrowers who may be struggling.

So, how does this capacity translate into action? For lenders and mortgage service providers, the most important thing is to understand a borrower’s experience, see a situation through their eyes, and provide support accordingly.  We will explore how to do so in our next article. 

For borrowers, it’s important to be proactive and persistent. We are already receiving more calls from people who are worried about what the future holds. Here are some of the steps we advise:

1. Plan ahead: Planning may seem scary right now, but it is important for people to be ready as their fixed term mortgages come to an end. Putting together a budget (if not already in place) is a good first step that allows borrowers to cost out what mortgage payments would be if and as they switch to a variable rate mortgage. There are plenty of free mortgage calculators available online that can help estimate what individuals can expect to pay at current rates, which are averaging around 8% at time of writing.
   
   
2. Speak with lenders: If borrowers are worried, they should contact their lender as soon as possible with an open, transparent rundown of their financial situation. Lenders have tools available to help but can only do so if they fully understand a borrower’s position.  The longer people wait, the worse the situation could become. Lenders may be able to work sooner than many would expect to create a plan to help mitigate the impact of the current rate environment.
   
   
3. Evaluate options: Thankfully, numerous strategies exist that can help borrowers in the short, medium, and long term, including term extensions, payment holidays, or temporary switches to an interest-only mortgage. Mortgage holders can talk through their concerns and options with their provider; many of the UK’s largest lenders have worked together with the Government on a new mortgage Charter designed to provide much needed support. This Charter lays out a set of provisions lenders will adopt, including one that means anyone who is worried about payments can contact their lender for help without it impacting their credit scores.
   
   Moreover, lenders have agreed to offer tailored support to anyone who may be struggling. Borrowers can discuss what options are available to them given their individual circumstances; it’s important to ask specifically what (if any) impact different payment options could have on credit scores. For example, switching to an interest-only mortgage for up to six months or lengthening the term of an overall mortgage to reduce monthly payments won’t affect credit scores, but other options might.
   
   
4. Speak with a Debt Advisory Counsellor: A debt advisory counselor can help borrowers assess their options, create a budget and develop a plan to help manage through this period. They can also negotiate with lenders on behalf of borrowers. Those who don’t know where to turn can ask their lenders, who are focused on borrower-centric outcomes and will be able to point customers in the right direction.
   
   
5. Be persistent: It may take some time for borrowers to identify a solution that works for them, but if they keep working with lenders and/or a debt advisory counselor and are prepared to make changes, such as cutting back on expenses in areas such as discretionary spending, they will find a way.

We face a new economic landscape in the UK as interest rates continue to rise, at least in the short term, but there are some principles that can support us all as we collectively navigate it. Namely, remaining calm and focused – there are solutions available to help people through this period – and being prepared and transparent.

These principles apply to mortgage lenders, servicers, and borrowers alike. It is our job to support customers and see the economic environment through their eyes. This perspective is needed more than ever today, and I believe it will dominate the way market leaders operate in the future. This isn’t 2008’s mortgage market. It brings a unique set of challenges, but we are better equipped than ever to tackle them together.

By Fraser Gemmell,

Group Chief Executive Officer