Mortgage Defaults Rise 30% in Three Months says the Bank of England... and lenders expect more missed payments triggered by soaring rates
Mortgage lenders saw an increase in the number of customers defaulting on their loans in the three months to the end of June, and expect more borrowers to miss payments in the coming months. Lenders responses to the Bank of England's Credit Conditions Survey revealed a 30% increase in mortgage defaults in the second quarter of the year.
This was an increase compared with the three months to March, when the proportion of missed payments increased by 14%. Lenders expect defaults to increase again in the third quarter, as rising interest rates and inflation continue to batter household finances. Stephen Perkins, managing director at broker, Yellow Brick Mortgages, said 'they're already rising, but lenders are expecting losses and default rates on secured loans to increase even further in the next quarter, which is unsurprising given the heights interest rates are now reaching. Demand [for credit] is also expected to fall in the third quarter, which again is what you would expect in such a brutal economic climate. Repeated increases to the Bank of England base rate have done nothing to curb inflation and are massively impacting the economy and pushing millions of British families' finances beyond the brink."
Overall, lenders expect the availability of secured credit such as mortgages to fall by 19% in the third quarter of the year. However, demand for secured home lending increased from April to June this year despite the mortgage market volatility. Demand for both home loans to purchase a property, and to remortgage, increased by 53% over the period.
Lenders expect this to fall sharply as households face the reality of significantly higher interest rates.
Demand for unsecured lending has increased ovder the past three months and is set to rise further as households manage inflation
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The Bank of England made its thirteenth successive base rate rise last month after disappointingly high inflation in May led the Monetary Policy Committee to continue its efforts to bring the figure down. Two-year fixed mortgage rates have reached a 15-year high, surpassing the level reached at the peak of the fallout from the mini-Budget in October last year.
The current average two-year fixed rate is now 6.75%, according to Moneyfacts, and the market expects rates to climb further before the end of the year. Demand for credit cards also increased by 25% in the second quarter of the year, highlighting the extent to which households are relying on credit to manage the impact of price inflation on budgets.
Lenders expect this to rise again by 10% over the three months from June.
Mortgage hell latest: 'Devastating impact' laid bare as UK sees biggest increase in defaults since 2009
Lenders have experienced the biggest increase in mortgage defaults since the fallout of the financial crash, the Bank of England has said. The Bank’s credit conditions survey revealed mortgage defaults in the three months to the end of May soared to 30.9 on its index.
The figure was 14 points lower in the first quarter of 2023. The latest data, which was published las week, is the highest recorded by the survey since it topped 60 in mid-2009. The survey measures mortgage defaults by asking lenders to report comparative changes and assigning scores based on their response and market share.
Lenders also fear demand for mortgages will fall sharply in the next financial quarter.
The availability of mortgages and non-mortgage credit to UK households could also plummet but credit available to businesses is expected to remain unchanged. The Bank of England said, “lenders reported that losses and default rates on secured loans to households increased in Q2, and were expected to increase in Q3.”
The findings come as a further blow to mortgage-holders as nearly a million homeowners can expect to see their monthly repayments soar by £500 or more by the end of 2026. Mortgage rates and interest rates have continued to increase over recent months as the Bank of England grapples with persistently high levels of inflation.
The average two-year fixed-rate mortgage now stands at 6.75% and the average five-year fix hit 6.27%. More than 75,000 homeowners were also behind on their mortgage payments in the first three months of the year, lobby group UK Finance has revealed. The Bank of England has raised interest rates from 0.1% in December 2021 to 5%.
The situation is not expected to get much better for Britons. Charlotte Harrison, head of mortgage products at Skipton Building Society, told MPs on the Treasury Select Committee “over the next six months we will see more customers with financial stress.”
Andrew Assam, homes director at Lloyds, added “we won’t lend people as much as we would have done historically because rates are much higher.”
Myron Jobson, senior personal finance analyst at interactive investor, said “the latest (Bank of England) poll of lenders lays bare the devasting impact the mortgage crisis and stubbornly high inflation is having on personal finances. Rising mortgage rates have pushed tight household budgets “to breaking point, evidenced by an uptick in losses and default rates on mortgages. It is therefore unsurprising that lenders are expected to tighten their belts and reduce the supply of home loans as a pre-emptive measure to offset anticipated credit losses.”
According to figures from UK Finance, about 2.4 million fixed-rate mortgages are due to end between now and the end of 2024.
The Bank’s latest credit conditions survey was carried out between May 30 and June 16, asking lenders to report changes in the three months to the end of May, relative to the previous three months.
The property market is deteriorating, warn Rics estate agents: House prices, buyer enquiries and sales all slump
Buyer interest, sales and property prices suffered in June as mortgage rates continued to rise, according to the latest results of a closely-watch survey.
June saw new buyer enquiries reach an eight-month low, pointing to a 'renewed deterioration' in the UK sales market, the Royal Institution of Chartered Surveyors said. Property prices continued to slow in June and many estate agents surveyed by Rics think further falls could be on the cards in the coming months.
Estate agents and surveyors expect activity in the housing market to remain subdued as higher borrowing costs hit new buyer enquiries. In the rental market, tenants are continuing to see rents rise, and June saw the biggest fall in landlord instruction numbers since May 2020, according to Rics.
Simon Rubinsohn, chief economist at Rics, said "the latest increase in interest rates and the impact this has already had on mortgage rates is clearly visible in the key Rics metrics regarding buyer enquiries, sales and prices which have all retreated over the past month. Inevitably in this environment, activity levels are likely to remain relatively subdued. However, an important message coming back from Rics agents is around ensuring prices are set with an eye on the market conditions of today, rather than the recent past; when this is done, sales are taking place. It is also worth bearing in mind that house prices are only very modestly down on their recent highs and well above where they stood prior to the onset of the pandemic. Further declines are possible but need to be seen in the context of the previous strength in the market. Additional questions included in the latest survey also provide some support for the notion that, on balance, properties with better energy efficiency credentials are holding their value better than some others."
Neil Foster, a partner at Hadrian Property Partners, added 'sales market feels like an oxymoron this month. Deals are few and far between and there is clear caution, particularly amongst buy to let investors, with the prospect of a perfect storm to come if the cost of debt continues to rise as prices begin to fall."
Buyer enquiries, prices and property sales down
An overall net balance of 45% of property professionals reported buyer enquiries falling rather than rising, deteriorating from a balance of 20% seeing this in May.
A net balance of 34% of professionals also reported newly agreed sales falling rather than rising, which was also a weaker figure than the balance of 8% observing this in May. This was the most downbeat sales figure since December 2022, when a net balance of 38% of professionals saw sales falling.
Less buyer interest: Buyer enquiries fell last month, new data from Rics shows
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Falling: UK property prices continued to fall in June, Rics said
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What's next? UK property price forecasts for the next year, according to Rics
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A net balance of 46% of estate agents reported house prices falling rather than rising, further deteriorating from a balance of 30% in May. Rics said some survey participants indicated that homes with better energy efficiency credentials are holding their value in the current market.
Figures from Moneyfactscompare.co.uk on Wednesday showed that, across all deposit sizes, the average two-year fixed residential mortgage was 6.70%, while the average five-year fix on the market was 6.20%. Earlier this week, average two-year fixed mortgage rates surpassed levels seen following last autumn’s mini budget.
Jeremy Leaf, north London estate agent and a former Rics residential chairman, said "there’s no doubt the latest rise in interest rates hit the market like a missile, prompting a pause for thought at the very lease among buyers. However, we saw in our offices very few actual withdrawals from purchases, although we did notice some renegotiation of terms, usually including price, on nearly every sale. Listings are picking up but not as quickly as we expected, with interest on appropriately-priced properties continuing to be dominated by cash or equity-rich buyers."
Britain's housing market faces pressure from softer buyer demand and falling house prices against a backdrop of surging mortgage rates and the Bank of England's battle to tame stubborn inflation. Average two-year fixed mortgage rates hit a 15-year high earlier this week.
Last week, Halifax said house prices fell by 2.6% year-on-year in June, the largest annual drop since 2011. Rival Nationwide reported a 3.5% annual decline in property prices, the biggest since 2009.
Landlord instructions fall to lowest since May 2020
For the rental market, a net balance of 40% of estate agents saw an increase in tenant demand last month, Rics said.
At the same time, a net balance of 36% saw landlord instructions falling rather than rising.
Instructions: Landlord instructions slowed again in June, Rics said
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Costly: Rents are expected to keep on rising over the next few months, Rics said
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With rising demand still being met with a lack of available properties to let, a net balance of 53% of experts surveyed expect rental prices to increase over the coming months. Summing up the state of play, Alex Mcneil, a partner at Bramleys, said 'rents keep increasing and availability keeps receding."
Ben Twomey, chief Executive of Generation Rent, said "soaring rents since the pandemic are now having a knock-on effect on the number of homes being advertised to rent. Many tenants might want to move but simply cannot because the rent on a new tenancy is now far higher than what they are currently paying. That means fewer properties are becoming available and those that do are being snapped up more quickly by tenants who do need to move. That is keeping rents high and unaffordable for many. To bring rents back within reach of people on ordinary incomes, the government needs to build more homes in the places people want to live. That must also include many more social homes so that people on low incomes can live near their workplaces and families."