UK lenders fear a spike in defaults on mortgages due to rising living costs

As the cost of living increases, more homeowners will default on their mortgages. This is the reason Britain’s mortgage lenders are worried.

According to the Bank of England, a survey of lenders revealed that they are prepared for a sharp rise in customers who cannot pay their monthly mortgage payments during the first quarter of this year.

According to the survey, defaults on credit cards and unsecured loans rose in the fourth quarter 2022 and will rise further this year.

Anti-poverty campaigners claim that rising mortgage interest rates and double digit inflation mean that many low and middle-income families will find it difficult to pay their loans.

The Resolution Foundation thinktank stated earlier this month, that an average mortgage payer who refinanced their loan in 2017 faced an additional PS3,000 in higher interest costs after nine increases in base rates at the Bank of England since December 2022.

The extra cost of food and energy have also pushed up the inflation rate in the UK to 10.5%. This is well above the Bank of England target of 2%.

Buyers who are looking to buy a home or get on the housing ladder will have a harder time finding a home.

According to the most recent mortgage data, house purchases continued to slow in the second half of last year. The central bank’s latest mortgage data showed that there were 46,100 mortgages approved in November. This is down from 59,000 in October.

The slump caused sales to plummet to the lowest levels since January 2011. If the June 2020 collapse to 40,500 is ruled out, the Covid-19 lockdown will be lifted.

Lenders reported that mortgage supply fell in the third quarter of 2022, and would decline again in the first three month of 2023.

They anticipated that they would sell fewer mortgages to house buyers in the first quarter, but this would be offset by an increase in remortgaging from existing customers.

Simon Gammon, Knight Frank’s managing partner in finance, stated that lenders are beginning to reduce mortgage rates due to warning signs that borrowing costs could be at a high point.

He said however that although mortgage rates are improving, “lenders expect housing market activity to slow down over the next weeks.”

He said that existing borrowers could see that conditions are much better than they were a few weeks ago. Rates, although declining, are unlikely be to rise any further. Now is the time to act.

According to the estate agency, UK mortgage rates will enter a “new normal” with the best five year fixed products being just under 4.5%.

Lenders informed the Bank of England that there would be a decrease in mortgages available in the first quarter of the year. This will leave first-time buyers with fewer options.

According to the central bank, the number of unsecured loans available would also drop. This will limit households’ access to regulated consumer credit like credit cards and short-term loans to make ends meets.