EU directive plan to halve arrears period may see repossessions jump

A clause in the European mortgage directive that would halve the time borrowers are allowed to be in arrears before being classed as in default has triggered fears of a surge in repossessions and mortgage costs.

Last week the Financial Times reported that the draft directive proposes all European mortgages that are 90 days in arrears should be treated as if they are in default, meaning they are classified as non-performing loans.

While this is already the situation in many European countries, UK borrowers are given 180 days before they are treated as if they are in default.

The change will push up costs for lenders, according to experts, as under Basel III rules they have to hold more capital for mortgages that are in default.

Michael Atkinson, director of brokerage Summit Capital Mortgages, says this will cause lenders to increase mortgage rates and restrict lending.

He says: “Were this directive to become law, the amount of slack UK lenders could give to struggling borrowers would be halved. At a stroke, it would pull the rug from under thousands of Britons who are struggling to keep up with their mortgage repayments.

“While this would be disastrous for borrowers who are plunged into default as a result, it would also pile extra pressure and costs onto lenders.”

The British Bankers’ Association says the clause is one of its top concerns regarding the directive, as borrowers who are struggling with repayments need to be given enough time to refinance or trade down to a smaller property.

A spokesman for the BBA says: “We believe the reduction in the maximum number of days at which default occurs is not reflective of the underlying risk fundamentals.”

But a spokeswoman for the Council of Mortgage Lenders says that while the change would be costly, it would not lead lenders to repossess struggling borrowers more quickly.

She says: “Lenders would still have to abide by the same Treating Customers Fairly rules.”