The financial regulator has estimated that up to 770,000 borrowers could be in arrears on their mortgage in the next two years.

The Financial Conduct Authority said in a letter to the Treasury Select Committee that, at the end of June 2022, there were 200,000 people in a shortfall on their mortgage – around 2.4% of all regulated mortgages.

But it forecast a further 570,000 borrowers could be at risk of falling behind over the next two years, based on its current interest rate expectations.

Mortgage rates have already risen sharply meaning that many borrowrs will face significant payment shock when they come to remortgage. The regulator said its figures took into account the fact that typical households were facing a fall in real incomes of 10%.

It added that those borrowers that already pay 30% of their gross household income on mortgage repayments are most at risk of falling into arrears.

Karen Noye, mortgage expert at Quilter, said: “News that over 750,000 people are at risk of defaulting on their mortgage will come as a worry to Britain’s housing market and the nation as a whole. While lenders are duty-bound to help their customers who are falling behind on payments, at some point, if payments can’t be paid, repossessions will eventually take place.

“Considering a repossession is disastrous for someone, lenders typically want to avoid this process, it is also costly for them as trying to recoup money from a sale has its own costs attached and can prove lengthy. If lots of repossessions take place at the same time, this will mean a slew of properties come to market, driving up supply while demand lags, and this will push down house prices.”

What to do if you are struggling?

Wealth management business, Quilter, has published its three top tips for borrowers who are worried about being able to pay their mortgage. It said:

1. Don’t bury your head in the sand

“Lenders will normally write to you within 15 days of a missed payment but if you are struggling with your bill, it is crucial that you talk to your lender before they contact you. Burying your head in the sand will only make things worse. Mortgage debt is what is described as a priority debt and as the name implies should be prioritised above most other types of debt you have.”

2. Work out what you can afford to pay back

“Before picking up the phone to your lender, take some time to work out exactly how much you can afford to pay back each month. There are budgeting tools available online or you could speak to a debt charity or Citizens Advice. If you have sought help, do let your lender know as showing that you have looked at ways of paying back your debt shows you’re serious about it, and can help avoid repossession orders down the line.”

3. Discuss ways of making payments

“Lenders have a duty to act fairly with customers who are having difficulties. Having a frank conversation with your lender can help them find a way for you to avoid the problem spiralling out of control. Lenders might be able to put you on a payment plan based on what you can afford to pay back. This could mean providing options to extend your mortgage term, or if your home is worth more than the mortgage, you might be given the option of adding your arrears to the total amount you owe and pay it back over the lifetime of the mortgage. We recommend that you seek advice from a qualified mortgage professional before opting for any plan, as some plans may end up with you paying much more interest over the lifetime of your mortgage.”