Credit, collections & insolvency news
Despite mortgage lending growth falling -0.1% (net) in 2023, demand for housing loans is expected to rebound this year, buoyed by the prospect of falling interest rates according to predictions by the EY ITEM Club.
It alsop predicts that the Bank of England will cut its policy rate from 5.25% to 4% by the end of 2024, and alongside falling inflation, the cost of home loans will also likely decrease. As a result it is forecasted that mortgage lending to grow 2.2% (net) this year, 3.4% (net) in 2025 and 3.3% (net) in 2026.
Consumer credit demand set to slow this year and next, as inflation continues to fall with unsecured credit grew 6.1% (net) in 2023, up from 4.2% (net) in 2022 – the fastest increase since 2017 – largely driven by inflation driving up the cost of goods and the cost-of-living crisis.
If inflation continues to fall in 2024, the demand for unsecured lending will likely slow in tandem, and EY ITEM Club expects growth in consumer credit to fall to 5.2% in 2024, and further to 4.2% in 2025, before rising slightly to 4.5% in 2026.
The report forecasts write-off rates on business loans to average 0.22% in 2024 due to the steep rise in borrowing costs. While this is an increase on 0.14% in 2023, these levels remain well below 1%-1.5% seen in the early 2010s. Impairments are expected to fall back to 0.18% in 2025 and 0.15% in 2026 if borrowing rates fall as predicted.
Rising unemployment and an increase in the number of mortgage holders coming off fixed priced products onto higher-priced deals have triggered a small rise in impairments. The EY ITEM Club forecasts with write-off rates to average 0.013% this year (up from 0.004% in 2023), 0.016% in 2025, and 0.013% in 2026. However, these rates are well below the peak of 0.08% post-financial crisis in 2009.
Write-off rates on consumer loans are forecast to rise to 1.5% this year – a slight increase on the 1% averaged in 2023 – as ‘higher for longer’ borrowing rates impact people’s ability to repay. It is expected that this falls back slightly to 1.4% in 2025 and 2026 – considerably lower than the peak of 5% in 2010 – as interest and borrowing rates fall.
Dan Cooper, UK Head of Banking and Capital Markets at EY said “There is no doubt that the economic environment has been extremely difficult for both businesses and households of late. While inflationary pressures are beginning to ease, borrowing costs remain high. Banks must continue to keep a close eye on how customers – particularly those most vulnerable – are managing, and on rising impairments, not least as fixed-rate mortgages roll onto higher rates this year.
“The banking sector continues to balance low levels of lending growth with the need to invest in strategic priorities and transformation objectives. While the economic climate is expected to improve this year, it will take some time to filter through the system and make a material difference to consumer and business sentiment. Despite this, banks must ensure that time, money and resource continue to flow into keys areas to remain competitive, such as AI innovation and sustainability.”