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Bank of England survey: Default rates continue rising in 2023 – but at slower pace

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According to bank responses to the Bank of England's quarterly credit conditions survey, default rates on secured lending - which includes mortgage lending - increased in the final quarter of 2023.
Default rates on unsecured lending picked up rapidly, lenders reported. A net 25.7 per cent of lenders had seen default rates on unsecured lending rise, compared to -7.6 per cent the quarter before.

Banks reported that default rates increased in the final quarter of 2023, albeit at a slower pace than the quarter before, but lenders are concerned that things will get worse again in the coming months.

According to bank responses to the Bank of England’s quarterly credit conditions survey, default rates on secured lending – which includes mortgage lending – increased in the final quarter of 2023.

A net balance of 23.6 per cent of lenders reported an increase in defaults in the quarter. While this signalled that default rates had increased, the figure was down from 43.3 per cent in the quarter before, showing defaults are increasing at a slower rate.

Looking into the next quarter, however, a net 39.7 per cent of lenders thought the rate of defaults would rise again. This compared to nearly 50 per cent last quarter.

Default rates on unsecured lending picked up rapidly, lenders reported. A net 25.7 per cent of lenders had seen default rates on unsecured lending rise, compared to -7.6 per cent the quarter before.

Interest rates have been hoisted to a post-financial crisis high of 5.25 per cent which has put pressure on a number of households having to refinance loans taken out when the cost of borrowing was much lower.

Mortgage arrears hit a six-year high in the three months to December, Bank of England data showed, although this was up from historically low levels.

The figures showed that 1.14 per cent of total loans were in arrears, compared to 3.64 per cent in the first quarter of 2009.

The survey is based on lenders’ own responses to the Bank’s survey, so does not reflect the Bank’s own opinion. Lenders who report that conditions have changed ‘a lot’ are given twice the score of those who say it has only changed ‘a little’.

The scores are then weighted by market share and turned into a net percentage balance, the difference between the balance of lenders reporting an increase or decrease in default rates.

Although demand for mortgage lending fell in the fourth quarter, lenders thought that it would pick up again in the first quarter of 2024.