Mortgage defaults expected to rise by 22% over next 12 months

The UK’s largest specialist mortgage lenders are accounting for a 22% increase in Expected Credit Loss (ECL) provision as mortgage defaults spike, according to a new report from AI powered transaction analytics firm, Fuse.

Analysis of the most recent financial statements of ten of the UK’s largest specialist mortgage lenders indicate that lenders are accounting for Expected Credit Losses (ECL) exceeding £760 million this year, compared to £625 million in the previous year.

Seven of the ten lenders highlighted in the research report an increase of more than 10% in their ECL provision. Just one – Bank of Ireland – reported a reduction in ECL allowance.

Household disposable income has been put under intense pressure in recent months due to the impact of rising interest rates on mortgages.

Research from the Financial Conduct Authority (FCA) shows that around 1.5 million fixed-rate mortgage deals will end this year. With millions of homeowners coming off generous long-term fixed deals and facing much higher fixed rate options or variable rates, monthly costs have been rising rapidly, with many using their savings to meet repayments.

Ultimately, increased financial pressure is leading to a rise in mortgage arrears – figures from the Bank of England show a 9.2% rise in arrears in Q4 2023 and a 50% increase on the previous year.

Previous research from Fuse also revealed that more than one in ten (12%) people are reliant on credit in order to pay their mortgage costs. In this context, the increase in mortgage ECL provision demonstrates lenders’ growing concerns around the impact of mortgage costs on household finances.

Recent research from Fuse reveals total ECL provision exceeded £19 billion in the most recent financial reports from 20 of the UK’s largest lenders, an increase of £788 million in the £18.3 billion allowance 12 months previously.

Sho Sugihara, CEO and Co-Founder of Fuse said “With homeowners under relentless pressure to meet ever-rising mortgage costs, the prospect of increased defaults appears inevitable.

“In order to protect mortgage holders from defaults, it’s vital that lenders introduce more effective approaches to assess affordability and utilise the full range of data insights at their disposal to ensure that they can step in at an earlier stage to offer support to homeowners who may be struggling.

“In this current climate, the much publicised 99% mortgage for first-time buyers being left out of the Chancellor’s recent Budget is a welcome move – many lenders had previously raised concerns that this scheme would raise the default rate further if introduced at a point where potential homeowners’ finances were already stretched paper thin.”