Mortgage Defaults Rising - and there’s likely to be worse to come

Analysts suggest that mortgage lending is likely to fall over the rest of 2023 with both demand and supply dropping thanks to high interest rates. 

The Bank of England’s credit conditions survey, released recently, says demand for mortgages fell in the third quarter and is expected to decrease in the fourth quarter. Banks also reported that they had been lending less, with available secured credit falling in the third quarter.

The survey shows that households are struggling to pay debts with default rates on mortgages - already up in the third quarter of this year - set to rise further between now and Christmas. Default rates for credit cards and for other loans were also both expected to increase in Q4. 

The Bank of England conducts its credit conditions survey every quarter to help it understand trends and maintain financial stability. Lenders are asked to report changes in the previous three months and their expectations for the next three months.

Jamie Lennox, director at Norwich-based broker Dimora Mortgages, was unsurprised by the rise in default rates as ever more people come off ultra-low fixed rates into a harsh rate environment, saying: "That default rates continue to increase comes as no surprise given that more consumers are starting to land on considerably higher mortgage rates. With the damage created by the previous 14 consecutive rate increases starting to feed through, the sad reality is that this is only the tip of the iceberg. More pain is set to come with Christmas around the corner, which will likely see consumers' affordability stretched to its limits."

Darryl Dhoffer, director at The Mortgage Expert, shared much the same view and warned another base rate rise could cause even more pain for homeowners: “There are no surprises here with these figures. Borrowing is down on mortgages, unsecured debts are level or mounting, and defaults on unsecured debts will be increasing as we move into the last quarter of this year. 

“Let's hope the next set of inflation figures show a level or downward curve, because any future base rate rises will only make these figures worse as we move into 2024. Consumers are really struggling right now.”

Meanwhile Craig Fish, director at Lodestone Mortgages & Protection, adds: “The purchase market is virtually non-existent. With increased rates and falling house prices, people have decided to wait until things settle before making any moves. Furthermore, due to the incompetence of the Bank of England resulting in 14 consecutive rate rises, it is no surprise that, as people come off historically low rates on much higher options, they will struggle to meet their mortgage payments. 

“I fear that we are only going to see these numbers worsen and default rates increase. It will get worse before it gets better. There is going to be nothing festive about the upcoming festive season.”