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. Depressed prices will add to the volatility of the housing market and could cause construction firms to cut back on home building.
- 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 the 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. It is not just homeowners who will experience difficulties, but firms wishing to expand may be caught up in the shortage of funds by banks.
- 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.
Problems for individuals who fall behind mortgage payments
- The stress of whether they might lose their home
- The high percentage of disposable income going on mortgage payments leaving less for other items of spending
- Possible extra penalty costs for missing mortgage payments. It is always better to try and let the bank know as costs may be waived if a plan to keep up payments is put in place.