In December last year the Council of Mortgage Lenders (CML) predicted that the percentage of mortgages more than three months in arrears would rise from 1.8% at the end of 2008 to 4.4% by end-2009. First-half performance has been much better than expected, with the arrears proportion standing at 2.4% at the end of June.

As well as undershooting forecasts, current arrears experience compares favourably with the recession and housing market downturn of the early 1990s. The CML's series for three-month-plus arrears starts in 1995 but rough estimates for earlier years can be derived from data on six-month-plus cases. The current 2.4% arrears proportion compares with an estimated peak of about 6% in 1992 – see chart.

As pointed out on page 29 of the August Inflation Report, employment has fallen by less than at the comparable stage of the last downturn, partly reflecting cuts in real pay. Government schemes are also helping: 220,000 households were receiving income support mortgage interest payments in May (although such support was also available in the 1990s), while the Department of Communities and Local Government has estimated eventual take-up of the homeowners mortgage support scheme – which allows borrowers to defer interest payments for up to two years – at 42,000.

The key factor suppressing arrears, however, is a lower burden of interest service costs than in the early 1990s. Household interest payments peaked at 10.9% of disposable incomes in the fourth quarter of 2007 versus a high of 15.0% reached in the third quarter of 1990. One year into the 1990-91 recession, the interest burden was still 11.6% of income; the latest figure – for the first quarter of 2009 – is 8.7% and a further decline to 7-7.5% is likely, based on more recent Bank of England data on effective interest rates.

So the interest burden is now nearing the bottom of its historical range, despite a record level of debt. A bearish view is that mortgage defaults have simply been postponed because interest service will rise rapidly once official rates start to normalise. The impact of policy tightening, however, may be partly offset by a narrowing of current wide lending spreads. Moreover, MPC action will be conditional on a solid recovery, implying more favourable labour market conditions for borrowers.

(Please note: an earlier version of this post used a National Statistics series for household interest payments that nets off an estimate of consumption of financial intermediation services. The chart and text have been updated to include these payments in the analysis, as is appropriate. Thanks to an observant reader for spotting this omission.)