UK bank expects mortgage defaults to rise amid cost of living

Mortgage defaults are set to rise as household budgets come under strain as the cost of living crisis deepens. Photo: Nathan Stirk/Getty Images

UK lenders plan to cut mortgage rates amid fears borrowers will default as the cost of living crisis deepens.

The Bank of England’s (BoE) quarterly credit conditions survey showed lenders plan to reduce the supply of mortgages to the market at the fastest rate since the start of the coronavirus pandemic.

With the exception of the COVID crisis, the projected rate of contraction was more pronounced in a single quarter in 2014 and in the immediate aftermath of the global financial crash of 2008.

The investigation, which was conducted within three weeks of Russia’s invasion of Ukraine, offered no explanation for plans to tighten home lending. However, lenders have warned that they expect defaults to rise over the next three months.

“The net percentage change in default rates on secured loans to households is expected to rise in the second quarter,” the BoE survey said.

Read more: UK inflation hits 30-year high of 7% as cost of living crisis deepens

It comes as UK households face a squeeze in the cost of living, just as interest rates rise to tame soaring inflation, which has reached a 30-year high of 7% in March. Higher interest rates make mortgages more expensive to pay off.

The decision to cut residential real estate loans follows 18 months of a scorching real estate market, with booming growth in house prices hitting a six-month high last month, according to Halifax.

The BoE survey also found that the margin earned by banks on products narrowed in the first quarter.

But as lending in the real estate market tightens, lenders still plan to step up the supply of unsecured debt like personal loans and credit card debt. Demand for both as well as the supply of unsecured credit has increased over the past year and is expected to remain strong over the next three months.

Read more: UK house prices register biggest rise in six months

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “With inflation accelerating and skyrocketing prices for many essentials, it has forced us to borrow to make ends meet.

“Credit card borrowing grew faster than any other month on record in February – the most recent month for which we have data.

“But although it looks like a short-term solution, you are creating problems for the future, as you add interest and repayments to the ever-growing mountain of monthly costs, making it harder and harder to stay on top of our finances every month.”

Watch: Will UK house prices ever drop?

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