Yahoo Finance UK banks expects rise in mortgage loan defaults amid cost of living crisis
British lenders plan to slash mortgage loan rates amid concerns that borrowers will default on repayments 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 on the market at the fastest pace since the onset the coronavirus pandemic.
With exception of the COVID crisis, the rate of contraction anticipated was steeper in just one quarter in 2014 and in the immediate aftermath of the global financial crash in 2008.
The survey, which was conducted in the three weeks shortly after Russia’s invaded Ukraine, provided no explanation for plans to tighten lending on property. However, lenders warned they expect defaults to rise over the coming three months.
“The net percentage balance for changes in default rates on secured loans to households was expected to increase in the second quarter," BoE's 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 tight cost of living squeeze just as interest rates are rising to tame surging inflation, which has hit a 30-year high of 7% in March. Higher interest rates make mortgages more expensive to service.
The decision to reduce residential property lending follows 18 months of a red hot property market, with booming house price growth, which last month hit a six-month high, according to Halifax.
BoE's survey also found that the margin made by banks on the products narrowed in the first quarter.
But while, lending in the property market is tightening lenders still plan to step up provision of unsecured debt like personal loans and credit card debt. Demand for both as well as the supply of unsecured credit increased in the past year and is expected to remain strong in the next three months.
Read more: UK house prices post biggest jump in six-months
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: "With inflation gathering momentum, and eye-watering price rises for many of the essentials, it has forced more of us to borrow to make ends meet.
"Credit card borrowing grew faster than any other month on record in February – the most recent month we have data for.
"But while this feels like a solution in the short term, you’re building up problems for the future, because you’re adding interest and repayments to the ever-growing mountain of monthly costs, which makes it harder and harder to stay on top of our finances each month."
Watch: Will UK house prices ever fall?
