“Lenders are likely to increase borrowing costs in 2012. Mortgage arrears are higher than previously reported and our bank’s overall exposure risk to the Eurozone market is greater than anticipated” Alison O’Connor

Source: The Estate Agent Today

Mortgage borrowing costs are likely to rise next year, the Bank of England has warned, whilst revealing that between 5% and 8% more households than known about are in trouble with their mortgages – but lenders are showing them forebearance and so their woes are not showing up on official figures.

It means that official arrears figures are being ‘significantly’ masked, according to a new report from the Bank of England.

Its Financial Stability Report has released the findings of a review by the Financial Services Authority, which – at the Bank’s request – looked at the potential scale of the problem.

The Bank was increasingly concerned that the true arrears picture was being masked by lender action.

The Bank’s FSR says: “FSA estimates indicate that around 5% of these households would have been in arrears of six or more months if they had not received forbearance.

“That suggests that, in the absence of forbearance, the mortgage arrears rate might have been 0.5 percentage points higher at 1.7%, even at near-zero official interest rates.”

The report warns that “lenders who have exercised greater forbearance could be more exposed to losses in the event of a sharp deterioration in macroeconomic conditions”.

Yesterday's gloomy report also warned that mortgage borrowing costs are set to rise next year, as banks which are heavily exposed to risk in Eurozone countries raise the costs of lending to each other.