Thursday 15 July 2021 1:14 pm

UK banks expect a rush of defaults in coming months

UK banks expect defaults to rise over the coming months as households struggle to service debt taken on to cope with the financial pressures of the Covid crisis, new figures released today reveal.

According to the Bank of England’s latest Credit Conditions Survey, banks expect default rates on unsecured lending – or credit card lending – to jump in the third quarter of this year.

The number of borrowers defaulting on secured lending is also forecast to rise in the third quarter.

Read more: UK banks bolster debt collection teams ahead of first Covid loan repayments

Household finances are likely to worsen as government support schemes designed to dampen the economic impact of the pandemic are wound down. A higher proportion of consumers struggling with financial stress may be prompting banks to forecast increasing default rates. 

The furlough scheme is scheduled to end at the end of September, while support measures for firms are also ending gradually, which is likely to put businesses under greater financial pressure.

Andrew Montlake, managing director of London-based independent mortgagee broker, Coreco said: “Banks know that there are a lot of struggling borrowers out there.”

UK banks have also been scaling their debt collection teams ahead of the first interest repayments on emergency Covid loans for firms.

Read more: UK unemployment rate falls as lockdown easing drives up hiring

Despite concerns over mounting borrower distress, lenders expect the availability of unsecured credit to rise in the coming months.

An increase in the supply of credit card lending may reflect banks increasing riskier borrowing activity to offset low net interest income as a result of the historic low interest rate environment.

Mortgage lending expected to cool

Banks expect mortgage lending to cool in the coming months as a result of the tapering of the stamp duty holiday.

“Demand for secured lending for house purchases was expected to decrease over the next quarter” the Bank of England said.

Robert Payne, co-founder of Bristol-based Langley House Mortgages, said: The housing market has boomed this year and we have submitted more mortgage applications than ever before but there is a huge amount of uncertainty in the economy and people need to be vigilant in terms of what they should borrow.”

Ashley Thomas, director of London-based mortgage broker, Magni Finance, said:With the main Stamp Duty relief now over, demand has certainly reduced and is likely to cool in the months ahead.

Read more: UK house prices swell 10 per cent year-on-year