Struggling households faced 'Herculean task' when remortgaging as defaults rise

Mortgage default rates among households have risen in the past few months – and are expected to rise again in the run-up to , according to a new survey.

The Bank of England’s Credit Conditions Survey found that defaults for non-mortgage lending, such as credit cards, have decreased recently, with banks and building societies expecting this trend to continue over the next few months. Lenders reported no change in default rates on loans to businesses of all sizes in recent months, and anticipate this to remain the same in the coming months.

The quarterly survey is part of the Bank of England's role in maintaining financial stability, asking lenders to report changes from March to May and expected changes up to the end of November. The survey was conducted between August 27 and September 13.

Lenders also noted an increase in the length of interest-free periods on credit cards for balance transfers in recent months, with a slight increase expected in the next quarter. Similarly, the length of interest-free periods on new credit cards for purchases has increased in the third quarter and is expected to rise slightly in the upcoming months.

The report also found that demand for mortgages from home buyers and those looking to remortgage is expected to rise in the next few months. Meanwhile, the demand for non-mortgage loans, including credit cards, is predicted to drop in the upcoming months.

The report also anticipates a slight decrease in corporate lending demand for small businesses, a minor increase for medium-sized businesses, and an overall increase for large businesses. Karim Haji, the global and UK head of financial services at KPMG, commented: "These latest figures suggest that many households are still struggling in the current environment."

He added: "Unsecured (non-mortgage) lending demand, while stable, remained elevated compared to the first quarter of the year. A fall in default rates for unsecured lending is an encouraging sign and reflects the cautious approach to credit being taken by households."

"Inflation could rise to 3% in early 2025, driven by higher energy prices and some forecasts predict headline inflation may return to target by the end of next year. This will take time to feed through to household finances. Coupled with the Bank’s cautious stance on interest rates, household spending power may not be unlocked any time soon.

"Even then, we are seeing a shift in consumer behaviour over the medium to longer term which is focused on saving not spending. Improvements in default rates can be short-lived so lenders mustn’t take their eye off the ball and ensure that they’re prepared to step back in to support under-pressure consumers."

Sarah Coles, head of personal finance at Hargreaves Lansdown, commented on the rising economic pressure, stating: "Mortgage default rates are mounting, and we’ve not yet reached the peak. Banks expect them to be up again by the end of the year. Given that those on lower incomes don’t tend to have mortgages, it demonstrates that higher mortgage rates are hitting middle earners hard."

Additionally, she highlighted the struggle homeowners face amid changing financial landscapes: "Anyone who has overstretched themselves in the property market, or took on too many fixed costs while mortgage rates were lower, has faced a Herculean task when they remortgaged."