More than one million mortgages are a "cause for concern" because of their riskier lending characteristics, the Financial Services Authority (FSA) has warned.
In its latest Financial Stability Report, the Authority says that nearly a third of new mortgages approved between 2005 and 2007 contained a higher element of risk – higher-than-usual loan-to-income multiples, extreme loan-to-value ratios and terms exceeding the typical 25-year period. Against a background of record consumer indebtedness – equivalent to £1,300bn – the watchdog said a combination of risk factors heightened "cause for concern" and that "we expect to see a growing number of consumers experiencing debt-repayment problems in 2008".
The FSA has also raised the prospect of the return of negative equity, not seen for 15 years. "The spectre of consumers having debt that exceeds the value of their property is not something that has materialised yet but it is certainly a risk we have to take seriously. We are also concerned that consumers are ill-prepared and have placed too much reliance on their ability to obtain cheap credit and housing wealth to sustain their consumption."
The FSA estimates that around one million mortgages taken out during the past few years have at least two risky characteristics – with 150,000 having three. Lyndon Nelson, the FSA's head of financial strategy, said: "It is not necessarily the affordability of the mortgage. It is their other debt. Consumers with other borrowings in addition to the mortgage are struggling, but we are unsighted on their other borrowings."
The FSA added that the estimated 1.4 million people due to come off short-term fixed-rate mortgages this year were likely to face a £210-a-month rise in repayments if they went on to a standard variable rate loan. Homeowners may find it increasingly difficult to afford a mortgage, while the less creditworthy may find it impossible to remortgage, as banks tighten up on their lending criteria. The "sub-prime" sector of the UK housing market has been estimated at between 5 and 15 per cent of the total. The recent cuts in rates by the Bank of England look set to slow as inflationary pressures restrict the Bank's room for manoeuvre.
The FSA said that while the level of repossessions was still relatively low, there had been a sharp rise since 2003. In a separate report, the Royal Institution of Chartered Surveyors predicted that nearly 45,000 people would lose their homes in 2008 as the cost of servicing a mortgage remains close to record levels.
Nor are things less risky in the City itself. The rogue trader scandal at the French bank Société Gé*érale is a "wake-up call" for all banks, the FSA said.