Britain’s mortgage lenders fear a rise in the number of homeowners handing back their keys as the cost of living crisis forces more people to default on their loans.
The Bank of England said a survey of lenders showed they were braced for a steep rise in the number of customers who cannot pay their monthly mortgage bills during the first quarter of the year.
The number of people defaulting on credit cards and unsecured credit loans increased in the fourth quarter of 2022 and would climb further this year, the survey found.
Anti poverty campaigners have said rocketing mortgage interest rates and double-digit inflation means many low and middle income families are likely to find their loans are unaffordable.
The Resolution Foundation thinktank said earlier this month that the average mortgage payer re-financing their loan faced an extra £3,000 a year in higher interest charges after nine increases in the Bank of England base rate since December 2022.
Households also face the extra costs of food and energy that have pushed the headline rate of annual UK inflation to 10.5%, well above the Bank of England’s 2% target.
Buyers looking to get a first foot on the housing ladder or to move home were also likely to face a tougher time finding a home and a mortgage.
The most recent mortgage data collected by the central bank showed house purchase activity continued to slow late last year, with the number of mortgages approved for home sales falling to 46,100 in November, down from 59,000 in October.
This slump brought the level of sales to their lowest level since January 2011 if the collapse in June 2020 to 40,500 during the first Covid-19 lockdown is stripped out.
Lenders reported that the supply of mortgages fell in the last quarter of 2022 and would slide again in the first three months of 2023.
They expected to sell fewer mortgages for house purchases in the first quarter of this year and this would only be offset by a small increase in remortgaging by existing customers.
Simon Gammon, managing partner in the finance arm of the estate agents Knight Frank, said lenders were beginning to cut mortgage rates in response to signs that borrowing costs were close to a peak.
skip past newsletter promotion
Sign up to Business Today
Free daily newsletter
Get set for the working day – we’ll point you to all the business news and analysis you need every morning
However, he said that while mortgage rates might be improving, “lenders are clearly expecting housing market activity to ebb over the coming weeks”.
He added that existing borrowers could “clearly see that conditions are better than they were just a few weeks ago and rates, though declining, are unlikely to ease much further and now is a good time to act”.
The estate agency expects UK mortgage rates to enter a “new normal, with the best five-year fixed products a little under 4.5%”.
Lenders told the Bank of England there was likely to be a decline in the number of mortgages on offer in the first quarter of this year, presenting first-time buyers with a more limited choice of loans.
The number of unsecured credit loans on offer would also decrease, the central bank said, limiting the access of households to regulated consumer credit such as credit cards and short-term loans to make ends meet.