Demand for mortgages and consumer finance rose in the first quarter and is expected to increase in the next three months as the cost-of-living crisis intensifies.
The Bank of England’s credit conditions survey also revealed that while default rates on unsecured lending and mortgage lending dropped in the first quarter, they are expected to rise in the second quarter.
On the supply side, lenders reported the availability of unsecured credit to households increased in the first quarter and was expected to rise in the next three months, while secured lending was unchanged in the three months to the end of February and is predicted to drop over the next quarter.
Read more: Consumer and business borrowing soars
“Plastic is fantastic again, and we are clamouring for more mortgages, but borrowing is set to get tougher,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
“Demand for loans and credit cards boomed at the start of this year. With inflation gathering momentum, and eye-watering price rises for many of the essentials, it has forced more of us to borrow to make ends meet.
“Rising rates are compounding the problem. The banks have started to pass rate rises onto borrowers, so you have to stretch your cash even further to cover interest payments. It’s no wonder that the banks say they’re expecting default rates on both mortgages and unsecured lending to rise in the next couple of months.”
Paul Heywood, chief data and analytics officer at Equifax UK, said as inflation hits consumers and defaults are predicted to rise, lenders should turn to tools like open banking for better credit assessments.
“The pressures of the cost-of-living crisis are pushing up demand for credit, especially in the unsecured lending and credit card spaces, while the same inflationary pressures, along with rising interest rates, are quelling demand for discretionary borrowing,” he said.
“On the supply side, credit providers have continued to report an increase in the availability of credit to households for unsecured lending. However, our figures highlight that arrears and defaults in the consumer credit market are already climbing, and there’s a risk at times like this that lenders prioritise borrowers in a stronger financial position.
“While lenders are right to be cautious, this crisis is different to the last one, and tools like open banking allow credit providers to lend with greater confidence to a wider pool of people.”