Lenders have reported that default rates on secured loans to households increased during the third quarter, and losses given default also increased slightly in the same period, according to the Bank of England Credit Conditions Survey (Q3) published this morning. Both were expected to increase in the fourth quarter as the impact of higher interest rates hits households hard.
Lenders also reported that default rates for total unsecured lending were unchanged in Q3, and were expected to increase in Q4. Within this, over the past three months default rates for credit cards slightly decreased and default rates for other loans increased. Ominously, default rates for credit cards and for other loans were both expected to increase in Q4.
Meanwhile, lenders reported that the availability of secured credit to households decreased in the three months to the end of August 2023 and was expected to decrease slightly over the next three months to the end of November 2023. Lenders reported that the availability of unsecured credit to households decreased in Q3 and was expected to be unchanged in Q4.
Lenders also said demand for secured lending for house purchase and remortgaging decreased in Q3, and was expected to decrease further in Q4. However, overall demand for unsecured lending slightly increased in Q3, and was expected to increase in Q4, a sign of the stress being placed upon households.
Jamie Lennox, director at Norwich-based broker, Dimora Mortgages, was unsurprised by the rise in default rates as ever more people come off ultra-low fixed rates into a harsh rate environment: “That default rates continue to increase comes as no surprise given that more consumers are starting to land on considerably higher mortgage rates. With the damage created by the previous 14 consecutive rate increases starting to feed through, the sad reality is that this is only the tip of the iceberg. More pain is set to come with Christmas around the corner, which will likely see consumers’ affordability stretched to its limits.”
Darryl Dhoffer, director at Bedford-based The Mortgage Expert, shared much the same view and warned another base rate rise could cause even more pain for homeowners: “There are no surprises here with these figures. Borrowing is down on mortgages, unsecured debts are level or mounting, and defaults on unsecured debts will be increasing as we move into the last quarter of this year. Let’s hope the next set of inflation figures show a level or downward curve, because any future base rate rises will only make these figures worse as we move into 2024. Consumers are really struggling right now.”
Craig Fish, director at Lodestone Mortgages & Protection, said the lack of demand was no surprise and was also concerned about mortgage holders coping in the months ahead. “The results of this survey come as no surprise. The purchase market is virtually non-existent. With increased rates and falling house prices, people have decided to wait until things settle before making any moves. Furthermore, due to the incompetence of the Bank of England resulting in 14 consecutive rate rises, it is no surprise that, as people come off historically low rates on much higher options, they will struggle to meet their mortgage payments. I fear that we are only going to see these numbers worsen and default rates increase. It will get worse before it gets better. There is going to be nothing festive about the upcoming festive season.”
Stephen Perkins, managing director at Norwich-based Yellow Brick Mortgages, agreed that conditions could deteriorate in the months ahead: “With a lot of households yet to be impacted by increased mortgage rates, things will almost certainly get worse in the fourth quarter and it could be a long time before we see any light at the end of the tunnel.”
Ranald Mitchell, director at Norwich-based Charwin Private Clients, said grim times lie ahead: “As expected, people are struggling to manage and are turning to unsecured credit as a pathway to survive. Unfortunately, it usually worsens their situation. The arrears figures provide a clear view that households are finding it hard to cope, and with more fixed-rate maturities around the corner, you can only expect this to increase. Grim times lie ahead.”
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