Lenders expect sharp rise in household loan defaults

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The figures from Threadneedle Street show banks expect a marked increase in the number of people who fail to meet repayments on credit cards, loans and other forms of unsecured borrowing over the next three months

Britain’s biggest high street lenders expect the sharpest increase in defaults on unsecured lending since 2009, according to a BoE survey, as households come under growing pressure amid the cost of living crisis.

The figures from Threadneedle Street show banks expect a marked increase in the number of people who fail to meet repayments on credit cards, loans and other forms of unsecured borrowing over the next three months.

An index of lenders’ expectations for defaults in Q1 2024 showed a reading of +31.7 on the Bank’s credit conditions survey. If the forecasts are correct, it would mark the sharpest quarterly rise in defaults since late 2009 during the global financial crisis.

Households are coming under mounting pressure from increasing borrowing costs after 14 successive interest rate rises from the central bank since December 2021, launched in response to the inflation shock triggered by supply shortages cause by the Covid pandemic and Russia-Ukraine conflict.

Defaults on mortgage payments also rose sharply at the end of last year, as per the credit conditions survey, and are expected to continue increasing in early 2024 as more borrowers feel the pinch.

In spite of a price war in the mortgage market at the start of the year, millions of homeowners are expected to face a sharp increase in borrowing costs as they reach the end of cheaper deals agreed before interest rates began to increase.

Sarah Coles, the head of personal finance at Hargreaves Lansdown, noted: There was a massive surge in missed debt repayments at the end of last year, as a large number of those whose finances had been on a knife-edge, finally tipped over into a debt disaster.

Lenders have been too pessimistic about potential increases in loan defaults in the recent past. As recently as late 2022, the index for default expectations over the next three months hit +34.3 for Q3 of 2023, but then dropped to +19.9 after the quarter was complete.

The latest survey showed that banks expected demand for mortgages for house purchase and remortgaging to have dropped in Q4 of last year, but would rise in the first three months of 2024. Demand for unsecured lending also dropped at the end of last year, but was expected to rise in the first quarter.

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