Lending is flowing thick and fast, but defaults loom: Bank of England

The Bank of England has published details of credit conditions in the second quarter of 2021:

  • It was easier to take out mortgages, credit cards and loans in the three months to June, and it’s set to get even easier in the following three months.
  • Demand for mortgages was up between April and June, but while the banks expect another boom in remortgaging in the coming months, they expect demand for mortgages for house purchases to fall.
  • Demand for credit cards and loans rose too, and is expected to increase further in the three months to September.
  • Price wars in the mortgage market squeezed bank margins in the three months to June and are expected to squeeze even harder in the following three months.
  • Mortgage defaults remained unchanged, but are expected to rise in the three months to September. Defaults on other secured lending had fallen, but are expected to rise.

Sarah Coles, personal finance analyst, Hargreaves Lansdown: “Borrowing is flowing thick and fast. We’re keen to take on more debt and the banks are equally enthusiastic about lending, because they’re optimistic about the economy, and want to grab market share while they can. But while the tap is firmly turned on, some borrowers risk sinking underwater, and defaults on all kinds of household borrowing are expected to rise.

“Banks are ready to lend throughout the mortgage market, so it’s not only those with big deposits who can track down deals. The three months to June saw a big surge in banks’ willingness to lend to people with less than a 10% deposit, and this is expected to rise slightly again in the following three months. Those who have been insulated from the effects of the pandemic are likely to be able to cash in on the mortgage price war by snapping up a cut-price remortgage deal.

“However, it’s not all going swimmingly for borrowers. The banks expect defaults on credit cards, loans and mortgages to increase in the three months to September. As the furlough scheme is phased out over the summer, there’s a good chance that there will be job losses, and people who have been struggling to keep their head above water will finally succumb. At the end of July, the final mortgage holidays will come to an end too, so there won’t be help from industry-wide schemes. It means borrowers will have to rely on whatever they can arrange with their lender.

“Since the onset of the crisis, lenders have been cutting credit card limits, in an effort to keep a lid on their exposure to bad debts. They continued to do so in the three months to June and say they will do it again in the three months to September.”