11 March 2019: Mortgage arrears would soar by 30% over the next three years in the event of a no-deal Brexit, according to data modelling by Kensington Mortgages, the specialist mortgage lender.
Using its proprietary risk modelling tool, Vector, Kensington’s analysts tested a series of scenarios* based on a representative data set of 750,000 loans (with an outstanding value of £97.2 billion) across the UK mortgage lending market.
Working on the assumption of a no-deal Brexit, with no government intervention, the model shows that there would be a sharp increase in the number of borrowers who would likely fall more than three months behind on their repayments.
The number of problem borrowers would be almost one third (30%) higher than it would if Britain were to remain in the European Union, the modelling predicts.
This would mean that by spring 2022 there would be 70,296 Britons more than three months behind on mortgage repayments, compared to 52,755 if Britain were to remain in the EU**.
Repossessions would also rise by about 10%, according to Kensington projections.
The model also forecasts that, five years after a no-deal Brexit, an extra one million Britons would still be repaying a mortgage who, under current conditions, would have either refinanced away from their existing lender or taken outright ownership of their home. This phenomenon would be driven by an expected decline in house prices and reduced mortgage finance availability, that would impact the amount of equity in the typical mortgage account.
Over the same five-year time frame, new mortgage lending would drop by about 17% relative to what would be expected without a British departure from the EU, and comparatively benign housing market conditions.
The economic assumptions used in the base case analysis, which assumes a no-Brexit scenario, are similar to the official models used by the Office of Budget Responsibility (OBR) and assume that house prices would grow 18% in the following five years and unemployment would remain flat.
Kensington’s Vector tool, which tracks the performance of loans over the past 20 years, predicts detailed information on loan repayment patterns and a borrower’s ability to repay debts when presented with forecasts for house price movements, unemployment levels and other macro-economic inputs.
Kensington also modelled what would happen in a no-deal Brexit where the Bank of England launched a large-scale intervention in financial markets, offering emergency liquidity to the banking sector and a reduction in market interest rates.
Under this scenario, the impact on homeowners would be substantially reduced. On some measures, homeowners would be better off in this scenario than they would were Britain to remain in the EU – although this gain would come at the expense of the public finances.
With a large-scale Bank of England operation in place, the model suggests that the number of borrowers more than three months behind on payments would be 3.7% lower than it would if Britain remained in its current trading position with Europe. The level of defaults would be unchanged.
Commenting on the research, Mark Arnold, CEO, Kensington Mortgages, said:
“Leaving the EU with no deal in place would, according to our model, see more homeowners struggle to make their monthly payments. Our expectation, however, would be that if we did end up exiting without a deal then the Bank of England would step in, as Mark Carney has hinted recently, and stabilise the market. Yet that would come at a cost to the taxpayer, with the public finances propping up homeowners at other people’s expense.
“The data shows that more and more people are struggling to get on the housing ladder, with the number of mortgages falling every year since 2008***. If there was an intervention it would mostly benefit existing home owners by inadvertently artificially propping up prices, to the detriment of would-be first-time buyers. So there would likely be some collateral damage under a no-deal scenario, and the number of mortgages may fall further still as a result.”
*The scenarios modelled by Kensington Mortgages are derived from data taken from a combination of sources including the Office for Budget Responsibility, Moody’s Analytics, as well as proprietary modelling assumptions.
**There are currently 59,264 Britons more than three months behind on mortgage repayments.
***According to Bank of England data - Table MM4 ‘Mortgages Outstanding by Type of Lender’.