16 Financial Conduct AuthorityFebruary 2014
TR14/3 Mortgage lenders’ arrears management and forbearance
The impact of over-indebtedness
Despite an extended period of low bank base rates, household debt-to-income remains high
and unsustainable levels of debt remain a key driver of financial distress for UK borrowers. This,
and the possibility of further debt accumulation, leaves some households exposed to potential
interest rate increases, income and expenditure shocks and changes to credit conditions. Lower
income and ‘credit-hungry’ borrower groups are likely to be particularly exposed in a changing
interest rate environment. These borrower groups have a higher than average concentration of
negative equity and are at risk of falling into arrears on their mortgage regardless of changes
in macro-economic conditions.
The impact of life events and the importance of considering borrowers’ specic
individual nancial and personal circumstances
Other drivers of financial difficulty can be exacerbated by over-indebtedness.
Borrowers who fall into arrears as a result of life events can also be particularly sensitive to lender
collection strategies. It is important that lenders understand a borrower’s specific individual
financial and personal circumstances before making decisions on the most appropriate action
to take.
The impact of any future interest rate increases
The current low interest-rate environment is likely to have reduced debt servicing costs and
supported indebted households through the post-crisis period - in part off-setting the impact
of inflation on living costs and negative real wage growth. Low rates and improvements in
funding conditions for lenders are likely to have supported firms’ forbearance strategies, for
example by reducing the financial costs of non-performing loans to firms.
The overall costs of forbearance to borrowers, where the ability to repay their arrears is absent,
can be high once you include fees, charges and interest costs as well as any loss on sale.
Lenders need to be alert to this risk.
Interest rates can be expected to increase as the economy improves. The impact of higher
rates on both firms and borrowers, and their response to this, will to some extent be impacted
by the environment against which rates start to rise (including house prices, wage inflation,
employment and household expenses). These risks may impact both borrowers currently in
arrears and those borrowers who are susceptible, for example, due to over-indebtedness.
Actions for rms
Firms should consider which borrowers are most likely to be affected by potential rate rises, for
example, those who have experienced payment problems in the past or those with a high loan-
to-income ratio, and consider deploying proactive strategies to engage them early.
Firms need to ensure their cultures, policies and practices are well placed to treat their customers
fairly. Firms must ensure that decisions around forbearance or repossession are suitable given the