Mortgage defaults rise at fastest pace since 2009

13th October 2023

A Bank of England survey of lenders shows that mortgage defaults have risen at their fastest pace since 2009.

The Bank’s research through its Credit Conditions Survey shows that the net percentage balance of defaults on secured loans to households jumped from 30.9% to 43.3% over the previous quarter, indicating that defaults had increased sharply across the banking sector.

Defaults on secured lending are expected to rise further in the coming quarter, with banks anticipating an eventual net balance of 47.4%. While existing homeowners struggled, buyer demand for new mortgages also fell sharply between June and September, with the net balance of lenders reporting a fall in demand for secured loans to households falling to -54.9%. This marks a steep slump on the positive reading of 52.7% in the previous quarter.

The report has also raised concerns about the increasing number of homeowners opting for mortgages with terms of 35 years or longer, with the rise driven by borrowers trying to mitigate the impact of higher interest rates. The Bank warned that while longer mortgage terms may provide short-term relief, they could lead to higher debt burdens in the long run.

The Bank has also highlighted the potential risks in the £250 billionn money market funds industry and has called for an overhaul of regulations to ensure their ability to sell assets quickly in times of crisis. Despite highlighting a number of challenges, the Bank said the UK banking system remains resilient. It also announced that its annual stress test of Britain’s biggest lenders will gauge their ability to withstand a broader range of hypothetical economic crises.

It adds that customer demand for secured lending for house purchases in the third quarter slumped to a balance of -54.9, from 52.7 in the previous three months. Banks expect demand to fall further in the final quarter of the year. 

While demand for secured lending for remortgages also tumbled to a balance of -22.8, from 51.3 in the period.  Lenders also point out that the proportion of household loan applications they approved slid to a balance of -30.2, from 14.9 in the period. 

Commenting on the date, Sho Sugihara, CEO and Co-Founder of Fuse, said “Borrowers are heading into a hugely challenging period as we enter winter and household bills are likely to spike. Our research shows that a third of lenders (32%) are already reporting an increase in borrower defaults over the last 12 months – however the situation seems set to only worsen as a result of interest rates climbing steadily for months and dwindling household savings start to run out.”

“With reliance on credit clearly on the rise, there are potentially millions across the UK who are at real risk of falling into long-term debt and being excluded from mainstream credit options. Lenders must ensure that they are fully utilising a wider range of insights to accurately analyse borrower affordability and vulnerability to help protect borrowers at a much earlier stage to prevent defaults.”