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UK Lenders Brace for Fresh Increase in Mortgage Defaults

(Moneyfacts)

(Bloomberg) -- UK banks are bracing for another jump in default rates on mortgages as home owners are forced to refinance at borrowing costs that remain stubbornly high.

Default rates climbed in the second quarter and the expected rise in coming months would be the biggest in a year if it comes to pass, according to the Bank of England’s quarterly credit conditions survey on Thursday. 

While the figures suggested demand for mortgages is recovering, they also showed the pressure from 14 back-to-back BOE interest rate rises remains painful for many households. 

“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. Nevertheless, he said a spike in defaults may be “short-lived” given the improving economic outlook.

Lenders said they expect to slightly increase the supply of mortgages in the third quarter and saw rising demand for home loans in recent months despite high mortgage rates, according to the survey.

Markets are leaning toward the BOE beginning to cut rates in either August or September, handing an early boost to the new Labour government. However, they are also betting on a cautious loosening in monetary policy given lingering price and wage pressures with a second cut only fully priced in by next February.

Mortgage rates have crept up since the start of the year after the BOE pushed back plans to reduce rates. Moneyfacts said the average 2-year fixed mortgage rate is at 5.92%, up from around 5.5% in January.

The BOE said that defaults also increased slightly on credit cards in the second quarter and were expected to be unchanged in third. Demand for borrowing on credit cards rose in recent months but was expected to fall again as household finances are bolstered by growing real wages.

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