Default rates on secured and unsecured loans are expected to rise in the first quarter of this year, as the Covid crisis hits household finances.
According to the most recent Bank of England credit conditions report, the default rate on secured loans to households remained steady in the fourth quarter of last year, but is expected to rise in the three months ending 28 February. Unsecured loans are also predicted to see higher default rates in early 2021.
As the UK prepares to enter a double-dip recession, lenders expect to see the availability of secured credit increase in response to rising demand for mortgages, remortgages, business lending and credit card lending.
In the fourth quarter of 2020, lenders reported an increase in overall demand for both secured and unsecured lending, with demand for unsecured lending expected to increase further in the first quarter of 2021.
Demand for credit card lending increased slightly at the end of last year, with further lending activity expected in this quarter. Banks are expecting to see more defaults on credit card and loan payments, and are shortening balance transfer periods to avoid people carrying unaffordable debts for longer.
Demand for secured lending for house purchases increased in the fourth quarter, but it is expected to stall slightly in the first quarter of this year as the housing market cools. Remortgaging activity is expected to increase over the same period as banks prepare for a wave of defaults in the mortgage market.
Meanwhile, demand for corporate lending from small- and medium-sized businesses decreased slightly at the end of last year. Demand for corporate lending was expected to decrease for small businesses in the first quarter of this year, but increase for medium and large businesses over the next quarter.
“The winter has sent a chill through the banks, as the impact of the pandemic starts to bite,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
“More people are set to fall short on mortgage and credit card payments, while an outbreak of cold feet in the property market is likely to mean less demand for mortgages for house purchases.
“Some homeowners have worked through the pandemic with their income unscathed, but enormous numbers saw their income cut as they lost work or went onto furlough. Some of them made a Herculean effort and somehow stayed on top of their bills. Others have done all they can, and taken every available payment holiday, and are still struggling.
“At the beginning of this year, the high street banks expect them to start defaulting on mortgage payments.”