The Hidden Cost of Missed Payments on Mortgages and Rentals

Every year Pepper Money bring out a Specialist Lending Study and the 2024 report, reveals some worrying statistics that will impact on property investors, as well as anybody else applying for a mortgage.

The report shows a significant increase in the number of people who have an adverse credit history.  The stats show that 8.38 million people in the UK have missed one or more payments in relation to their debts during the last three years. 

This is a huge number, effectively more than 1 in every 10 people in the UK.

The defaults might be for anything you’ve made a commitment to pay and failed to do so.  This includes:

• An unauthorised overdraft
• Outstanding bills for utilities, phone, council tax, etc.
• Late or missed payments on finance agreements, such as cars, household items, etc.
• Mortgage or rent payments

Any spots on your credit record can disqualify you from getting a mortgage.  However, bear in mind that 64% of people with adverse credit who don’t own their own home at present, have aspirations to purchase a property and 1.76 million of that 8.38 million with adverse credit have plans to buy a property within the next year.

What are the most common defaults?

• Risk credit payments – credit cards, finance arrangements, HP, etc 11%
• Where default notices issued – cumulative 7%
• Unsecured arrears e.g. personal loans – 7%
• Secured arrears – mortgages – 5%

While some of these people may only have slipped up once, such as a late payment due to being away on holiday and waiting until return to make a payment, the impact on your credit record doesn’t differentiate.

In fact, nearly half of the people surveyed admitted that they had missed more than one payment.  And 6% entered into debt management plan, while another 4% ended up with a County Court Judgment against them.

The mortgage lenders’ perspective

Typically, lenders are intolerant of adverse credit.  They have to take a risk to lend money, so they are taking a close look at how applicants manage their financial commitments.  Not paying on time is a red flag for the lender.  Anyone with adverse credit is, in effect, saying ‘I don’t always meet my monthly commitments’.

Lenders do have an arrears and a recovery department, but there is a cost to operating this, in staffing and services, if their defaults increase.  They don’t want to invest funds in what a cost centre (rather than a profit centre), so their aim is to take on as few borrowers as possible who are likely to require these services.

All lenders don’t approach the issue of adverse credit in the same way.  Different companies have a different viewpoint.  Mortgage underwriting is an exercise in risk mitigation, so the cheapest rates will have lowest risk profile.  It’s the only was to de-risk their lending to the maximum in order to offer the lowest rates. 

This approach is based on zero tolerance; one missed payment during last three years eliminates you.

Most people can get a mortgage, the issue is how costly is it going to be?  Defaults and CCJs make it really tough, but any adverse credit means you’re going to pay higher rates at best.  At worst, you may have to wait until you have a three year clean sheet.

The knock on effect

Mortgage rates aren’t as good as they were anyway, so investors have already been hit with an increase.

The bottom line for people with adverse credit is an unenviable choice

1. Pay the higher rates and suck it up
2. If you can’t afford to pay higher rates, meaning you can’t afford to buy the only other option available is to rent, and properties to rent appear to be in ever decreasing supply.

Rental increases pre 2016 were around 2% per annum, since 2016 the annual increase is nearer to 9%.  This means that tenants are paying higher and higher rents.

People in ordinary jobs struggle to afford to find somewhere to live they can afford.  Rental properties are fewer and as soon as a property is listed to let the owner or agent is inundated with applications, so the property is rapidly unlisted as dozens of people want to view.

This has resulted in tenants paying rent they can’t really afford, because their options are so limited.  They’re likely to become one of the adverse credit statistics.  In the survey 57% admitted that their monthly disposable income was decreasing because of rising outgoings.

The government hasn’t helped

There’s been a pincer movement – with anti-landlord legislation and rising interest rates.

In the face of three major issues – which have impacted the economy:

• The Pandemic and the ongoing fallout
• Liz Truss’ disastrous budget in 2022
• The invasion of Ukraine

The various governments have united in penalising landlords.  They’re all chasing the wrong issue.  The legislation for rental reform penalises good landlords, but has a blind spot in relation to rogue tenants.  The legislation would be better focusing on rogue landlords and ensuring bad tenants cannot get off scot-free.

It’s not about greedy landlords, it’s about affordability. 

Where are you in this equation?

Most of us have had to deal with increased costs – mortgage interest, energy costs, food prices increasing – but have we considered the impact of missing even just one payment?

The impact of one lapse can be far reaching, particularly if your income is built on property.  The more it costs to purchase, the more outgoings you have, the less profit you make – so your disposable income is eroded. 

Have you got a three-year clean credit sheet?

It’s a problem – but there doesn’t appear to be a solution.