Discuss the economic problems that might arise from large numbers of people falling behind with their mortgage repayments
The problems of people falling behind with their mortgage payments include:
- Mortgage defaults will rise causing people to sell houses. If people are forced to sell houses the increased number of houses on the market will depress house prices.
- Lower house prices will cause a negative wealth effect leading to lower confidence and lower consumer spending. This will lead to lower economic growth.
- Banks Lose Money. If people are defaulting on mortgage payments, banks will lose money. This is particularly a problem because:
- Banks are short of liquidity in current crisis.
- Mortgage defaults usually rise with house prices falling. Therefore as the banks sell the house they will lose out.
- Because banks are losing money, they will be reluctant to lend new mortgages without large deposits. This makes it difficult for first time buyers to get on the property ladder. A decline in bank lending can also lead to lower investment in the economy.
- Lower consumer spending. People who have fallen behind in mortgage payments are likely to be reducing other areas of consumer spending to try and meet payments. This will lead to lower economic growth.
- See: How do Mortgage defaults affect the economy
- Rate of Mortgage repossessions in UK
- How to avoid defaulting on mortgage payments
Policies to avoid mortgage defaults will be published tomorrow