Can an August interest rate cut save stretched borrowers?
UK lenders are preparing for a potential rise in mortgage defaults as homeowners face refinancing at persistently high borrowing costs.
According to the Bank of England’s quarterly credit conditions survey released today, default rates increased in the second quarter. If the anticipated rise occurs in the coming months, it would be the largest in a year.
Despite an indication that mortgage demand is rebounding, the survey highlights that many households continue to struggle with the impact of 14 consecutive interest rate hikes by the BOE.
“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,” Karim Haji, global and UK head of financial services at KPMG told Bloomberg. However, he noted that a spike in defaults may be “short-lived” due to the improving economic outlook.
According to official FCA figures, the value of outstanding mortgage balances with arrears increased by 4.2% from the previous quarter, to £21.3 billion, and was 44.5% higher than a year earlier The proportion of the total loan balances with arrears, relative to all outstanding mortgage balances, increased on the quarter from 1.23% to 1.28%, the highest since 2016 Q4
Lenders anticipate a slight increase in mortgage supply in the third quarter and have observed growing demand for home loans recently, even with high mortgage rates.
Markets are expecting the BOE to start cutting rates by August or September, which would provide an early advantage to the new Labour government. However, a cautious approach to loosening monetary policy is anticipated, with a second rate cut not fully expected until next February due to ongoing price and wage pressures.
Mortgage rates have risen since the beginning of the year, following the BOE’s delay in reducing rates. Moneyfacts reported that the average two-year fixed mortgage rate is now at 5.92%, up from approximately 5.5% in January.
The BOE also noted a slight increase in credit card defaults in the second quarter, with expectations of stability in the third. While there has been a recent rise in demand for credit card borrowing, it is expected to decrease as household finances improve with rising real wages.
