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UK banks expect sharp rise in defaults on unsecured debt


Britain’s biggest high street lenders expect the sharpest rise in defaults on unsecured lending since 2009, according to a Bank of England survey, as households come under growing pressure amid the cost of living crisis.

The figures from Threadneedle Street show banks expect a marked rise in the number of people who fail to meet repayments on credit cards, loans and other forms of unsecured borrowing over the next three months.

An index of lenders’ expectations for defaults in the first quarter of 2024 showed a reading of +31.7 on the Bank’s credit conditions survey. If the forecasts are accurate, it would mark the sharpest quarterly rise in defaults since late 2009 during the global financial crisis.

Households are coming under mounting pressure from rising borrowing costs after 14 consecutive interest rate rises from the central bank since December 2021, launched in response to the inflation shock triggered by supply shortages cause by the Covid pandemic and Russia’s war in Ukraine.

Defaults on mortgage payments also increased sharply at the end of last year, according to the credit conditions survey, and are expected to continue rising in early 2024 as more borrowers feel the pinch.

Despite a price war in the mortgage market at the start of the year, millions of homeowners are expected to face a sharp rise in borrowing costs as they reach the end of cheaper deals agreed before interest rates began to rise.

Sarah Coles, the head of personal finance at the investment platform Hargreaves Lansdown, said: “There was a massive surge in missed debt repayments at the end of last year, as a huge number of those whose finances had been on a knife-edge, finally tipped over into a debt disaster.”

Lenders have been too pessimistic about potential increases in loan defaults in the recent past. As recently as late 2022, the index for default expectations over the next three months hit +34.3 for the third quarter of 2023, but then fell to +19.9 after the quarter was complete.

The latest survey showed that banks expected demand for mortgages for house purchase and remortgaging to have fallen in the fourth quarter of last year, but would pick up in the first three months of 2024. Demand for unsecured lending also fell at the end of last year, but was expected to increase in the first quarter.

Coles said high street banks had not yet taken steps to clamp down on lending, although they were shortening the period of interest-free credit cards in response to concerns over consumers’ ability to repay.

“However, if the picture worsens again in the coming months, they may well take more steps to limit their lending. It means those who are counting on being able to borrow more to get through could find themselves running into a brick wall,” she added.

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