The results of the Bank of England’s (BoE) credit conditions survey are measured in net percentage balances between -100 and 100, with responses dependent on lender market shares.
Defaults dipped during the current quarter, with 4.0 per cent of lenders reporting a rise in Q2 compared to 21.3 per cent in Q1. Looking ahead, a net balance of 19.5 per cent of lenders predict this will increase, coinciding with the withdrawal of numerous Covid-19 support measures.
The average credit quality of those taking a mortgage is set to weaken too, lenders predicted.
Over the next quarter, the credit quality of borrowers is expected to decline to –0.6, compared with the actual reading of 16.1 in Q2.
Purchase activity nosedive
The demand for purchase and remortgage lending rose in Q2, with response scores of 81.1 per cent and 22.5 per cent respectively.
Remortgage demand is expected to hold up in Q3, with a positive lender score of 11.8 per cent. Purchase demand is set to decline significantly, according to a net balance of –48.7 per cent of lenders.
Buy-to-let purchase demand will also fall from a positive response score of 49 in Q2 to a prediction of –6.7 in Q3.
Lenders expect the availability of mortgages to remain fairly stable in Q3, with a prediction reading of 16.5 per cent. This is compared to the 39.1 per cent of lenders who reported an improvement in the availability of secured lending.
This is likely due to the rapid return of high loan to value (LTV) mortgages over the first few months of the year, which has since levelled off.
The changing economic outlook will affect provision of mortgage lending the most, according to 25.4 per cent of lenders.
Competition on rates is expected to continue, with lenders anticipating narrowing spreads relative to the Bank Rate or the appropriate swap rate in Q3.
Andrew Montlake, managing director of Coreco, said: “It’s curious that banks expect defaults to increase during Q3 and at the same time supply also to increase, as they engage in a price war. Banks know that there are a lot of struggling borrowers out there, but equally have to lend to meet their targets.
“It’s a hugely delicate balancing act of lending while accepting that defaults are likely to nudge up.”
Richard Pike, Phoebus Software sales and marketing director, added: “As interesting as this latest credit conditions survey is, the market is changing almost daily. The report shows that there were few changes in Q2 compared to Q1, but that lenders expect Q3 to differ in all four categories.
“The upshot is that this is an unpredictable market and until the end of at least Q3 it is likely to remain so. By then furlough will have ended and the vast majority of the population will be fully immunised. Many people will be taking stock as we return to normal, looking at their finances and, for many, quality of life. The question now is one of long-term confidence.”