Lenders expect further rise in mortgage defaults in coming months

UK lenders are expecting a further jump in default rates on home loans in the coming months, according to a Bank of England survey, as mortgage holders face higher refinancing costs.

Mortgage default rates rose in the second quarter of 2024, and banks and building societies are bracing for the largest jump in defaults in a year over the next three months, the Bank’s latest credit conditions survey showed.

In its bid to tame runaway inflation, the central bank’s 14 consecutive rate hikes between December 2021 and August 2023 have put pressure on household borrowing.

“As more and more households’ mortgages come up for renewal, it follows that with significant jumps in monthly repayments the number of defaults could rise,” said Karim Haji, global and UK head of financial services at KPMG.

“Given the improving economic outlook, any upward momentum in defaults should be short lived, although lenders should remain vigilant.”

The Bank’s survey also found that mortgage availability is expected to increase slightly over the third quarter, with lenders noting increased demand for home loans over the last few months even as mortgage rates remained elevated.

Lenders said they expected to leave the availability of non-mortgage credit to households unchanged in the third quarter, while the availability of loans to businesses is also set to be unchanged.

For the second quarter, lenders reported a slight increase in default rates on credit cards, although these are expected to be unchanged over the coming months.

With inflation back to the Bank’s two per cent target, traders are betting on an interest rate cut in August or September. However, policymakers are still concerned about price and wage pressures, with a second cut not expected until early next year.

In January, hopes for an interest rate cut as soon as March triggered a price war among lenders that saw mortgage rates fall. However, rates have since risen following hawkish comments from policymakers and worse-than-expected economic data.

The average two-year fixed mortgage rate is currently 5.92 per cent, according to financial information website Moneyfacts, up from around 5.5 per cent at the start of the year.