RUNAWAY inflation, imminent recession, mortgages up and incomes down…
What’s more, this situation is unfolding in the wake of one of the worst global pandemics on record as well as the ongoing, horrific war in Ukraine.
To state the obvious, we’re navigating our way through truly uncharted economic waters.
Let’s briefly look at the facts to appraise what’s unfolding.
The latest figures from the Office for National Statistics (ONS) shows UK inflation rose to a 40-year high of 10.1% in the year to July 2022.
At the start of August, the Bank of England said that inflation will reach 13%, which will simultaneously reduce the value of wages while making everything more expensive.
There was subsequently a new prediction from US financial services group Citi that UK inflation could reach 18% early in 2023.
Whatever transpires, Threadneedle Street has warned that the UK is unlikely to witness a single quarter of growth until the start of 2024 because of the deepening cost-of-living crisis.
It also predicted that there will also be a 5 percent fall in household incomes over the same period – the biggest fall since records began more than half a century ago.
Consequently, it came as little surprise when the Bank of England also announced its biggest increase in interest rates in 27 years in August.
The rise of 0.5 percentage points takes the UK base rate to 1.75%, a 13-year high – and further increases are expected imminently.
It’s been well-documented that Threadneedle Street is seeking to curb soaring inflation – especially since average energy bills will now hit £3,554 for a typical household in October, up from £1,971 currently.
More energy price hikes are also anticipated unless the new Prime Minister intervenes.
So, what does everything that’s evolving at such an incredibly rapid pace mean for lenders?
In short, lenders – like the proverbial buyers – must truly beware.
The unprecedented nature of this “rate shock” is likely to unravel quickly and economists are already warning that house price falls are now imminent.
Their rationale for making this prediction is simple.
The Bank of England’s sixth consecutive rate rise means that repayments on loans are rising twice as fast as they did in the run-up to the financial crisis of 2008.
It’s been well documented that a series of rate rises in the 1980s – to a peak of 15 percent in 1989 – helped trigger three-and-a-half years of falling house prices in the early 1990s.
So, what needs to happen?
Given the unprecedented economic uncertainty that now exists in the wake of the worst pandemic in living memory as well as the war in Ukraine, it’s inevitable that defaults will increase.
This will manifest itself either through arrears on mortgage payments or due to the expiry of the loan term.
All the evidence suggests that there’s now likely to be something akin to an unprecedented tsunami of defaults.
I’m aware from conversations with lenders that the appetite to lend remains high within the specialist finance market, but loan to values may increasingly struggle to meet outstanding debt figures.
If borrowers are unable to raise the funds to cover shortfalls it will prevent refinance exits from progressing.
Lenders simply must be aware of underperforming or default loans – now more than ever.
And this is especially the case where the term has expired and they want to allocate those funds to other deals.
It’s equally imperative that lenders consider the speed with which it’s possible to recover default loans.
As the backlog of possession claims increases, lenders owe it to themselves to ensure that they’re in the best possible position to relend at the optimum rate using their own funds at the earliest opportunity.
CG&Co has consistently achieved this for our clients before, during and after the pandemic.
And we’ve no intention of deviating from our highly proactive approach as the economic turbulence unravels in coming weeks, months and years.