Bank of England warns mortgage defaults to rise in months ahead

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The number of mortgage defaults are expected to rise in the coming months, according to Bank of England data released on Thursday, while the number of new loans will continue to fall amid warnings that the “golden era” of cheap deals is ending.

The UK central bank’s latest quarterly credit conditions survey paints a gloomy picture, with the number of mortgage deals already falling before the chancellor’s mini-budget on 23 September.

Kwasi Kwarteng’s package of unfunded tax cuts led to chaos for homebuyers, with hundreds of fixed-rate deals withdrawn over the space of a few days, before lenders returned with significantly more expensive deals.

Lenders surveyed by the Bank said the availability of secured credit to households, namely mortgages, declined in the three months to the end of August, and with further falls expected over the next three months to the end of November. The data, which was gathered before the mini-budget, found a similar picture for unsecured personal loans and credit card borrowing.

The availability of credit to businesses of all sizes was unchanged in the third quarter but was expected to worsen in the current quarter.

Mortgage rates have shot up: the average two-year fixed mortgage hit 6.46% this week, the highest since the financial crisis in 2008, while the average five-year deal was 6.28%, according to Moneyfacts.

“We are at the end of the golden age for cheap mortgages and with further interest rate rises seemingly around the corner, homeownership is set to become more costly for many of those on the property ladder and those reaching for the first rung,” said Myron Jobson, a senior personal finance analyst at the investment platform interactive investor.

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Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, tweeted: “The Bank of England’s credit conditions survey shows that lenders were preparing to tighten access to mortgages even before the mini-budget. But the mini-budget has greatly hastened the rate of deterioration. Good luck to anyone refinancing right now.”

The Bank survey also showed that default rates on mortgages slightly increased between July and September and were expected to go up further between October and December, while defaults on credit cards and other unsecured loans are also set to rise as the squeeze on household finances from the cost of living intensifies.

Jobson said: “It is a worrying sign of finances being stretched and financial resilience being tested like never before among many of those relying on loans and plastic.

“The new data supports findings from various house prices indices that demand for homebuying in the UK has tailed off and is set to cool, as house prices remain stubbornly high and mortgage rates have risen to levels we haven’t seen since before the financial crisis – pricing many out of the property market. With the ongoing supply-demand mismatch in property propping up house prices, the immediate casualty of higher mortgage rates could be transactions rather than house prices.”

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However, the value of homes is eventually expected to fall. Some analysts including Capital Economics are forecasting a drop in UK house prices of 15% to 20% next year.

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The Royal Institution of Chartered Surveyors has warned homeowners will struggle to keep up with their mortgage payments and repossessions will rise next year as the UK’s 13-year housing market boom comes to an end.

Buyer demand – judged on inquiries about homes for sale on Zoopla – have dropped by more than a fifth in the last two weeks, since the mini-budget sent mortgage rates soaring, the property website reported. It said: “Mortgage rates were set to rise to 4%-5% over 2022 before the mini-budget.

“This, together with increases in the cost of living, was starting to weaken demand for homes over the summer months. The fallout from the mini-budget has effectively added an extra 1% to mortgage rates, which are now settling around the 6% mark. This increase represents a 25-30% hit to the buying power of homebuyers using a mortgage.”

The commercial property market will also take a hammering. Goldman Sachs is predicting prices will fall between 15% and 20% between June this year and the end of 2024, saying developers will struggle because of a sharp rise in borrowing costs.

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