Banks predict mortgage default rise and higher credit card borrowing costs

The Bank of England survey shows that lenders expect the net balance of default rates on unsecured lending to increase in Q4. They also expect default rates on mortgages, which were unchanged from July to September, to simultaneously increase in the next three months.

According to the survey, lenders found that the net balance for default rates on secured lending was unchanged from July to September, but they expect this to rise in the next three months.

Lenders also told the Bank of England that losses on secured loans were already starting to increase in Q3 and they are expected to rise even further in Q4.

The survey also revealed that lenders expect the net balance for default rates to increase for businesses of any size from now until the end of the year. Lenders explained that the net percentage balance of losses on defaulted SME loans increased slightly during the past three months.

Availability of unsecured credit to households, the survey shows, decreased in Q3 and lenders expect it to shrink further until the end of the year.

The survey also revealed shrinking levels of risk appetite across the major lenders. Credit scoring criteria for total unsecured credit applications tightened in Q3, and its expected to tighten further in Q4, and the same is true for secured lending.

Lenders told the Bank of England that loan pricing, across both unsecured and secured lending, would become more expensive for consumers in the next three months.

They reported that the length of interest-free periods on credit cards for balance transfers and for purchases decreased in Q3 and were expected to decrease slightly in the next quarter.

Peter Tutton, head of policy at StepChange Debt Charity, said: “There is already a large number of people who have borrowed to get through the financial stresses of the pandemic. This group looks set to be joined by households affected by the end of the furlough scheme, the unwinding of the industry’s mortgage payment holiday scheme, and increases in redundancies, all of which are likely to increase demand for borrowing.

“Creditors must be alert for early signs of difficulty and show forbearance, and the government needs to step in with higher levels of support if we are to limit the levels of defaults and keep more families from falling into poverty.”

The extent to which defaults may rise across secured and unsecured lending will be a key topic at the Credit Summit, which will be held over four days from 3 November.