CML optimistic on repossessions and “payment shock”

The Council of Mortgage Lenders (CML) is not altogether in agreement with a recent gloomy report from the Financial Services Authority (FSA) about the prospects for repossessions during 2008.

Last month the Authority published its Financial Risk Outlook (FRO), which stated that up to a million UK households are vulnerable to default on their mortgage payments.

The FRO based this statistic on risk factors as follows: 90%+ loan-to-value ratio, 25+ year term, and 3.5+ times income multiple.

The CML is of the opinion that only a small proportion of borrowers with “high-risk” loans defined in this way will be experiencing difficulties, stating: “Clearly, households with high borrowing relative to income and/or property value will find it more difficult to get through periods of difficulty than less indebted households, but these characteristics in themselves do not predict default levels.”

The Council is also more optimistic that the FRO about the future of the 1.4 million fixed-rate borrowers who will come to the end of their fixed-rate terms in the next year.

It has been suggested that a large number of households will experience “payment shock”, facing an average rise in mortgage payments of £210 a month, if they remortgage on their lenders’ standard variable rates.

According to the CML, it is highly unlikely that most of these borrowers will revert to their lenders’ standard variable rates; they are more likely to remortgage with a new fixed or tracker rate, resulting a much lower average increase in monthly payments.

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