The latest data from the Bank of England indicates that lenders anticipate an increase in mortgage default rates in the coming months. This prediction follows a rise in default rates on home loans during the second quarter (Q2) of 2024, with banks and building societies expecting further increases in the next three months. Additionally, lenders reported a slight rise in default rates on credit cards in Q2.
Current Lending Landscape
The Bank of England’s latest credit conditions survey offers a mixed view of the lending environment. It reveals that while mortgage availability is expected to increase slightly in the third quarter (Q3) of 2024, the availability of loans to businesses is predicted to remain unchanged. On the supply side, lenders noted that the availability of secured credit to households was stable in the three months leading up to May 2024, with a slight increase anticipated by the end of August 2024.
Industry Reactions
Karim Haji, Global and UK Head of Financial Services at KPMG, commented on the findings:
“These latest figures present a complex picture of the current lending landscape. With inflation having finally dropped to the Bank of England’s 2% target, we’ve seen demand for lending increase across the board. The falls in inflation, combined with positive wage growth in the past year, are starting to alleviate cost of living pressures on households and unlock more spending power. Yet interest rates remain high, and despite expected cuts, they are unlikely to return to the levels seen when the hiking cycle began. The cost of borrowing remains a major burden on those who have made use of lending facilities since the 2022 mini-budget or will be thinking of doing so in the coming months.”
Haji also highlighted the potential for an increase in mortgage defaults as more households face significant jumps in monthly repayments when their mortgages come up for renewal:
“Given the improving economic outlook, any upward momentum in defaults should be short-lived, although lenders should remain vigilant.”
Tom Cuppello, Director of Risk at Broadstone, echoed these sentiments, emphasizing the ongoing impact of rate rises on households:
“The Bank of England’s latest Credit Conditions Survey demonstrates how rate rises continue to impact households. Defaults on mortgages and credit products both rose through the last quarter as the increased borrowing costs weigh on consumers. The Bank of England also forecasts defaults to continue growing over the next three months as more people face the reality of higher-for-longer rates on their borrowing.”
Cuppello referred to recent data from the Financial Conduct Authority (FCA) showing that the value of outstanding mortgage balances with arrears increased by 4.2% through Q1 2024, reaching £21.3 billion, which is 44.5% higher than a year earlier:
“The economic situation is biting, but demand for borrowing remains high amid a continued cost of living crisis that is driving more consumers to the credit market.”
Regulatory and Legislative Measures
Both Haji and Cuppello stressed the importance of lenders supporting the long-term financial interests of their customers. The UK Government’s Mortgage Charter, the advent of Consumer Duty, and additional regulation demonstrate a legislative direction towards protecting borrowers during turbulent economic times.
As the economic landscape evolves, lenders are expected to play a critical role in mitigating the impacts of high borrowing costs and supporting consumers through potential financial hardships. The data underscores the need for vigilance and proactive measures to ensure stability in the mortgage market and the broader financial system.
