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# Mortgage arrear sand possessionsstatistics Informationnote

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Mortgage arrear sand possessionsstatistics Informationnote

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### Mortgage arrear sand possessionsstatistics Informationnote

1. 1. More Mortgage Info Mortgage arrears and possessions statistics - information note For information, this note explains why we now focus primarily on the “percentage of balance” arrears measure rather than the “number of months” measure. The two different measures of mortgage arrears We publish two different measures of mortgage arrears: One reports the number of households more than 3 months (or 6 months, or 12 months) in arrears. But, for the reasons we explain below, at the moment this measure is problematic when trying to make historical comparisons. The other measure records the number of households whose arrears total 2.5% or more (or 5%, or 7.5%, or 10%) of the total outstanding balance on their mortgage. We believe this is a better measure for making historical comparisons. What’s wrong with the months in arrears measure? To calculate the number of months in arrears, we simply divide the accumulated arrears by the current monthly payment. So, as interest rates fall, the same value of accumulated arrears represents a higher number of monthly payments. Because official interest rates have fallen so far and so fast, beginning 2008 at 5.5% but now standing at 0.5%, the effect over the course of 2008/2009 is particularly pronounced. For example, a borrower with a £100,000 interest-only mortgage might have been paying a rate of around 7.5% at the beginning of 2008, making their contractual monthly payment £625. But by the spring of this year, the same borrower might have seen their rate fall to 4.5%, with their contractual payment only £375. If this borrower fell £1,500 behind on their mortgage, at the beginning of 2008 this would have been equal to 2.4 months arrears. But by the spring of this year, £1,500 would equate to 4 months arrears. However, using the “percentage of balance” figure, the borrower would be 1.5% in arrears in either period. Because there are many households with a small amount of arrears, and fewer households with large amounts of arrears, lower mortgage rates tend to inflate the reported number of arrears cases in most arrears bands. Although this doesn’t make the number of months measure “wrong”, it is very important to be aware of the artificial impact - caused purely by this arithmetic effect - on the reported numbers during a period of sharply falling mortgage rates. The table below shows some further examples of the effect, on both an interest-only and a repayment mortgage (note that the impact is different for these different mortgage types). Illustration of how changing interest rates affect reported arrears, a 25-year £100,000 mortgage currently £2,500 in arrears Interest only mortgage Repayment mortgage Mortgage rate Monthly payment, £ Number of months Monthly payment, £ Number of months payments payments represented by represented by £2,500 arrears £2,500 arrears 7.5% 625 4.0 748 3.3 6.0% 500 5.0 652 3.8 4.5% 375 6.7 562 4.4
2. 2. More Mortgage Info What about repossessions? The number of repossessions published by the CML relates to the total number of repossessions taken by first-charge lenders in CML membership (including buy-to-let), representing around 98% of the total mortgage market. The CML data does not include the number of repossessions triggered by the action of second-charge lenders, although second-charge lenders’ activity is included in the data published on the same day by the Ministry of Justice on court activity for mortgage possession. For ease of reference, the table below outlines the similarities and differences between the three main sources of data on arrears and repossessions. Covered in figures: CML MoJ FSA Geography UK England & Wales Regional data Loan coverage 1st charge (exc. BTL) BTL (for regulated firms) 2nd charge (for regulated firms) Other Possessions Court- ordered possessions data Voluntary possessions Arrears data By number of months (over 3 months) By percent of balance (2.5% or (1.5% or more) more) Issued by CML press office, 14 August 2009 © Copyright August 2009 Council of Mortgage Lenders address North West Wing Bush House Aldwych London WC2B 4PJ telephone 0845 373 6771 fax 0845 373 6778 website www.cml.org.uk