The Bank of England’s Credit Conditions survey was conducted between 30 August and 16 September, before the fallout from the government’s mini Budget and the latest base rate rise to 2.25 per cent.
A negative economic outlook, reduced risk appetite and house price expectations were cited as the main reasons behind a lack of credit availability in the coming months.
This decline in credit is expected to be felt across all lending tiers, as lenders said the availability for borrowers requiring loans at 75 per cent loan to value (LTV) and lower, as well as borrowers seeking finance for high LTVs, had fallen in Q3.
Lenders expect this availability to slip even further in Q4, with scores of negative 39.3 per cent* for low LTV borrowers and negative 44.1 per cent for high LTV borrowers.
Tightening criteria
Lenders said the credit scoring criteria for mortgages had tightened in the last three months, with a score of negative 11.5 per cent and this is expected to get stricter over the next quarter with a reading of negative 25.1 per cent.
It is also expected that fewer mortgages will be approved in Q4, with lenders giving a score of negative 12.3 per cent over the next three months compared to a reading of negative 5.8 per cent for loan approvals in Q3.
Respondents said demand for mortgages for house purchases fell in Q3 and predicted it would continue to decline in Q4. However, demand for remortgaging rose in Q3 and is set to rise further in the next three months.
Mortgage demand from both residential and buy-to-let borrowers is expected to reduce over the next quarter.
Rise in defaults
Lenders said the default rate on mortgages had gone up in Q3, with a score of seven per cent. More defaults are expected in Q4, with a net balance of 29 per cent for the period.
Respondents also noted that mortgage rates rose in Q3 and were expected to go up slightly in Q4.
‘Worrying sign of finances being stretched’
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “The Bank of England’s latest quarterly credit conditions survey shows lenders expect defaults on mortgages, credit cards and other loans to increase over the coming months as the cost-of-living squeeze becomes more acute. It is a worrying sign of finances being stretched and financial resilence being tested like never before among many of those relying on loans and plastic.
“Interestingly, the availability of loans is expected to dip which could suggest that lenders are tightening their belts amid the uncertainty in the money market at present.”
He added: “The new data supports findings from various house prices indices that demand for homebuying in the UK has tailed off and is set to cool as house prices remain stubbornly high and mortgage rates have risen to levels we haven’t seen since before the financial crisis – pricing many out of the property market. With the ongoing supply-demand mismatch in property propping up house prices, the immediate casualty of higher mortgage rates could be transactions rather than house prices.
“The fact remains that it feels like we are at the end of the golden age for cheap mortgages and with further interest rate rises seemingly around the corner, homeownership is set to become more costly for many of those on the property ladder and those reaching for the first rung.
“With wages expected to further trail behind inflation this year and borrowing costs continuing to rise, staying on top of rising prices remains a daily struggle for consumers at the lower end of the income spectrum in particular. The bleak prognosis lays bare, if it was needed, the financial difficulties a great many a set to face in the run up to the festive period.”
* The survey’s results are calculated with net percentage balances which vary between scores of negative 100 and 100 depending on how many lenders report positive or negative changes and is weighted by their market share.
