Lenders saw an increase in losses and default rates on secured loans to households in Q2, according to the latest data from the Bank of England’s Credit Conditions Survey for Q2 2023.
Lenders observed that default rates for total unsecured lending remained unchanged in Q2 and were expected to increase slightly going into Q3.
Default rates on loans to corporates remained unchanged for businesses of all sizes, while demand for secured lending for house purchase and remortgaging increased.
The availability of secured credit to households decreased in the three months of Q2 and the availability of unsecured credit to households remained stagnant.
Reaction:
Riz Malik, founder and director at R3 Mortgages:
“It is highly troubling to see that the rates of default on secured loans are escalating and are anticipated to rise further.
“Equally distressing is the projection from the Bank of England that the supply of secured credit is set to diminish in the forthcoming quarter.
“At what stage does the disheartening economic statistics the Bank of England disseminates become uncomfortable for them, especially when they are aware that their own actions have in some way shaped this dismal outlook?”
Stephen Perkins, managing director at Yellow Brick Mortgages:
“They’re already rising, but lenders are expecting losses and default rates on secured loans to increase even further in the next quarter, which is unsurprising given the heights interest rates are now reaching.
“Demand is also expected to fall in the third quarter, which again is what you would expect in such a brutal economic climate.
“As the saying goes, the definition of insanity is doing the same thing over and over and expecting different results.
“And that’s exactly what the Bank of England has kept doing. Repeated increases to the Bank of England base rate have done nothing to curb inflation and are massively impacting the economy and pushing millions of British families’ finances beyond the brink.
“We need to look at a different approach and select a different tool for the job. The repeated use of the base rate hammer is not turning the inflation screw and is merely causing untold damage.”
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial:
“In simple terms, this survey shows more people are wanting credit, but the banks aren’t making it available.
“This is no surprise, as we are heading towards a recession.
“Consumers are clinging on by their fingertips, so defaults were broadly flat, but with significant increases to the base rate recently, more are almost certainly coming.”
Justin Moy, managing director at EHF Mortgages:
“This latest Bank of England survey confirms what we are facing at the moment, namely demand for mortgages reducing, increasing defaults and missed payments, and less appetite to borrow generally.
“Borrowers are attempting to reign in their unsecured debt, often using family savings, including from the Bank of Mum and Dad, to reduce outgoings, as it’s the only way to afford these brutal mortgage payment increases.
“Unfortunately, some won’t have that option and will inevitably default at some point. I’m not sure if the report actually reflects the current strategy of reducing inflation, but this shows that borrowers are suffering, and will suffer more over the next 12-18 months at least.”
Ian Hepworth, director at Funding Solutions UK Limited:
“The expected increase in default rates among small businesses won’t come as a surprise. Millions of small businesses are in a brutal place right now.
“Since December 2021, the base rate has increased by 4.9% and is expected to rise further. For perspective, that means a business borrowing £100,000 could be paying an extra £4,900 per annum in interest. A business borrowing £1m would pay an extra £49,000 per year.
“This hike in interest costs is alongside higher fuel prices, increased costs of raw materials, increased energy bills and growing wage demands from employees. Many small businesses are caught in a perfect storm.”
Darryl Dhoffer, mortgage expert at The Mortgage Expert:
“This report reminded me of playing a game of golf around Wentworth with 40mph winds blowing against you, and the commentators saying, ‘Overall, the conditions are pretty good, a little bit choppy in places, but the players will be fine.’
“It’s how the picture is painted that determines the story that unfolds, and we have some seasoned artists in high places.
“It always feels like these reports are working in arrears, or some period in the past, and do not really state what is happening on the ground now.”
Mark Grant, business finance adviser at The Business Finance Branch:
“Business confidence is on its knees, and many SMEs are in an impossibly difficult position at present, so it’s no surprise lenders are predicting default rates among small businesses to increase.
“No increase in all sizes of corporate default rates in Q2 is welcome, but it’s what happens next that matters.
“Large corporates will see fewer defaults but have a reduced demand for credit, a sign that not only do they not plan to grow, but that they might contract this year.
“Small business default rates are forecast to increase, and so will their demand for credit. They may be borrowing to trade out of their situation, or simply to keep the doors open.
“Combined with wage growth and GDP data this week, small business owners especially have a lot on their shoulders right now.”
Paul Welch, founder and CEO at Large Mortgage Loans:
“What we have to remember is that behind this data is the fact that real people, real families, real small business owners are facing the threat of losing their homes and businesses. Hard-working, proud folk, who’ve kept up with mortgage payments, are defaulting on their loans.
“This cannot be allowed to continue otherwise we can throw in a mental health crisis as well. Banks urgently need come up with some solutions.
“We want to see them proactively helping borrowers rather than waiting for borrowers to come to them for help as some won’t due to the shame that they feel.
“We’ve also seen a massive jump in bridging loans, mainly for those whose property purchase is in danger of falling through and they need to complete before their mortgage deal falls through.
“Bridging loans are a specialist line of credit so the fact that these are being secured at such a rate tells you how frenzied the market is right now.”
