Income Shocks, Mortgage Repayment Risk and Financial Distress Among UK Households

John Gathergood

Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: This paper examines the prevalence of mortgage arrears in the U.K using the British Household Panel Survey (BHPS). The majority of reported problems occur in the first few years after purchase. Episodes of unemployment, long-term sickness or relationship breakdown all predict repayment difficulties, as well as measures of leverage and income gearing at the point of origination. Using proxy measures for unemployment risk, ill-health risk and separation risk at the time of purchase, constructed from a variety of instruments, repayment difficulties are shown to be strongly correlated with ex ante repayment risk. This result raises questions about the efficiency of the mortgage lending process and the possibility that a significant proportion of mortgage arrears and defaults could be prevented by improved screening of repayment risk at the time of application.

Date: 2009-03
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