According to the BoE’s quarterly credit conditions survey, default rates rose in the second quarter
UK lenders are preparing for a potential increase in mortgage defaults as homeowners face refinancing at persistently high borrowing costs.
According to the BoE’s quarterly credit conditions survey released today, default rates rose in the second quarter. If the expected increase occurs in the coming months, it would be the biggest in a year.
Despite an indication that mortgage demand is bouncing back, the survey highlights that many households continue to struggle with the impact of 14 successive interest rate hikes by the Bank of England.
As more and more households’ mortgages come up for renewal, it follows that with significant hikes in monthly repayments the number of defaults could increase, Karim Haji, global and UK head of financial services at KPMG told Bloomberg. However, he noted that a rise in defaults may be “short-lived” due to the improving economic outlook.
As per official FCA figures, the value of outstanding mortgage balances with arrears rose by 4.2% from the previous quarter, to £21.3 billion, and was 44.5% higher than a year earlier. The proportion of the total loan balances with arrears, relative to all outstanding mortgage balances, rose on the quarter from 1.23% to 1.28%, the highest since 2016 Q4.
Lenders expect a marginal rise in mortgage supply in the third quarter and have observed growing demand for home loans recently, even with high mortgage rates.
Markets are expecting the Bank of England to start lowering rates by August or September, which would provide an early advantage to the new Labour government. Nevertheless, a cautious approach to loosening monetary policy is expected, with a second rate cut not fully expected until next February due to ongoing price and wage pressures.
Mortgage rates have increased since the beginning of the year, following the Bank of England’s delay in lowering rates. Moneyfacts reported that the average two-year fixed mortgage rate is now at 5.92%, up from around 5.5% in January.