More than 750,000 households are at risk of defaulting on their mortgages over the next two years as soaring borrowing costs make payments unaffordable, Britain's financial regulator has warned.
The Financial Conduct Authority (FCA) said that more than 200,000 households had already fallen behind on payments by the end of June 2022 - with bills overdue on around one in 40 home loans.
Nikhil Rathi, the FCA's chief executive, has suggested many of these households are already thousands of pounds behind, with 117,000 borrowers failing to pay a sum equal to more than 1.5pc of the balance of their mortgage.
The watchdog said a further 570,000 households were “at risk of payment shortfall” within the next two years, meaning their mortgage costs are set to climb to more than 30pc of their income.
The warning, issued in a letter to MPs on the Treasury Select Committee, will trigger fresh fears that a wave of forced property sales could bring down house prices in the coming months.
It comes amid the biggest living standards squeeze on record after households were battered by rising interest rates and the highest inflation for 41 years.
Mr Rathi said the number of defaults depended on how many people lose their jobs this year, with the economy expected to enter a recession lasting at least until the end of 2023.
The Bank of England has warned that millions of homeowners on fixed rate mortgages face an average payment increase of £3,000 a year as borrowing costs rise and Threadneedle Street battles to keep a lid on inflation.
Official figures this week showed that monthly mortgage payments will triple for more than 800,000 households this year.
Mr Rathi said he expected some people at risk of default to change their spending habits so they avoid missing mortgage payments.
He said: "Some people will be able to reduce their spending or make use of savings to help them meet their mortgage commitments."
He also noted that the FCA's default assumptions were based on interest rate expectations on September 23, the day of former chancellor Kwasi Kwarteng's ill-fated mini-Budget.
At the time interest rates were expected to peak at 5.5pc, from their current 3.5pc level.
An improvement on the markets means that the Bank of England's base rate, which is used as a reference point by high street lenders to set thousands of mortgage rates, is now expected to go no higher than 4.5pc. This suggests the number of actual defaults could be much lower.
When a customer is in default, their bank will typically offer to agree a payment plan, with homes only repossessed as a last resort.
The FCA highlighted that repossession numbers are currently "low". While the most recent data have been distorted by a backlog in the courts owing to the pandemic, the FCA said there were 835 repossessions in the three months to June, which Mr Rathi has described as "an extremely low number".
By comparison, repossession rates averaged between 1,100 and 1,400 each quarter before the pandemic.
A peak of 13,200 properties were repossessed in England and Wales at the height of the financial crisis in the three months to March 2009, with 48,900 properties taken by the courts overall that year.
House prices fell for the fourth straight month in December last year to £281,272, according to Halifax, and are down more than 4pc from their August peak.
The OBR believes prices will drop 9pc between the fourth quarter of 2022 and the end of 2024, driven by significantly higher mortgage rates and the economic downturn.
They plunged by more than 20pc during the financial crisis.
Mr Rathi has previously warned that young borrowers aged under 30 were "particularly at risk" of default. These first time buyers had "quite often stretched themselves to purchase a property", he said, adding: "They may have got a fixed-rate mortgage at 2pc or 2.5pc. When that expires, they may be looking at a materially higher rate of 5pc or more."
The FCA has also warned that borrowers who used the Help to Buy scheme, which allowed first-time buyers to get a property with just a 5pc deposit, may be at greater risk of default as they also start paying interest on the interest-free component of their purchase, as well as being forced to fork out thousands of pounds more every year as they switch deals. "That is a part of the market that we will need to watch very closely indeed."
The Resolution Foundation think tank has warned that a slump in house prices will leave almost 140,000 young people living in a property worth less than their mortgage.
An estimated 1.4m homeowners will have to remortgage this year, according to the Office for National Statistics.