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Mortgage costs expected to rise this year, says Bank of England

mortgage  A builder removes scaffolding from a new property in the planned community of Poundbury, built on land owned by, and with the design approved by Britain's Prince Charles, on the outskirts of Dorchester, Britain, August 19, 2022. REUTERS/Toby Melville
Prospective home-buyers are being put off by higher mortgage costs and the cost of living crisis. Photo: Toby Melville/Reuters

UK lenders expect to mortgage costs to rise as inflation and recession fears are predicted to increase the number of loan defaults.

The Bank of England’s quarterly Credit Conditions Survey revealed that UK lenders predicted a further widening in mortgage lending spreads in the three months to the end of February.

The banks also admitted they were expecting more UK households to default on their loans amid the cost of living crisis. The survey said the default rate remained unchanged in the last three months of 2022 but “was expected to increase in Q1”, meaning December through the end of February.

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Mike Staton, director of Mansfield-based mortgage broker, Staton Mortgages, said: Mortgage pricing became frankly ridiculous in the run-up to Christmas. It was as if Ebenezer Scrooge was setting the prices. We are already seeing a rise in the number of borrowers who have missed their latest mortgage payments.

"The past three years have been painfully hard on people’s finances anyway and soaring inflation and rising rates following the mini-Budget were the straw that broke the camel’s back. As a result it’s no surprise lenders expect the number of people defaulting on both secured and unsecured loans to rise in the months ahead.”

The survey also warned that lenders estimated a decrease in the availability of mortgages, consumer loans and corporate credit to decrease in the coming months.

Kylie-Ann Gatecliffe, director at Selby-based broker, KAG Financial, said: “Amid the sheer destruction and chaos the mini-Budget left in its path, a large amount of mortgage products were withdrawn from the market almost overnight, explaining the reduced supply.”

The Bank of England had previously said in its Financial Stability Report that economic conditions had deteriorated, with UK households being “stretched” by rising interest rates and soaring inflation.

"Significant pressure" will be placed on the ability of households to meet their debts as monthly payments on around 4 million mortgages are expected to increase over the next year.

Justin Moy, founder at Chelmsford-based mortgage broker, EHF Mortgages, said: “Fixed-rate pricing eased as money markets became more secure and confidence returned in part. 2023 has seen further easing, but lenders won’t want to go below 4% alone in the market for fear of onerous activity levels, but a cartel-style approach by lenders may help ease the pressure.”

Read more: House prices fall for third consecutive month as mortgage costs keep buyers away

Overall mortgage lending is expected to fall 15%, returning to pre-pandemic levels, according to UK Finance.

The trade body expects the number of property transactions to fall 21% next year from around 1.2 million in 2022 to 1 million in 2023.

The value of lending to homeowners is set to fall 23% and lending to landlords should drop by 27%.

Watch: How much money do I need to buy a house?