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UK mortgage loan defaults declined for the first time in three years in the third quarter, according to a Bank of England survey that suggests financial pressure on homeowners is easing.
Default rates on household secured loans dropped to minus 8.1 in the third quarter, down from 0.8 in the previous three months, the quarterly survey of banks and building societies showed.
The figure marks the first fall since the end of 2022, and is well below the recent peak of 43.3 registered in the third quarter of 2023.
The data suggests “the drag from high interest rates” is fading, said Rob Wood, economist at Pantheon Macroeconomics.
“Falling mortgage distress reduces the risk of drops in house prices and suggests that households can pare back seemingly elevated saving rates,” he added.
The interest rate rose from a record low of 0.1 per cent in 2020 and 2021 to a 15-year high of 5.25 per cent in August 2023, remaining at that level until mid-2024, when it started to come down.
The score is calculated by a balance of banks reporting rises and falls in mortgage defaults.
The survey, conducted over the first 19 days of September, also showed lenders expecting a sharp decline in defaults in the next three months, with a score of minus 10.3, the lowest since fourth-quarter 2019, before the Covid-19 pandemic.
Last year, mortgage arrears rose to the highest rate since 2016, according to separate BoE data published last month, reflecting a surge in mortgage costs as the bank increased interest rates to curb high inflation.
However, borrowing costs have been falling since the summer of 2024, easing the strain on household finances.
The BoE is expected to keep interest rates on hold at 4 per cent for the rest of the year, but cut borrowing costs by a quarter of a percentage point twice next year.
Lenders also reported an increase in credit supply with demand from businesses rising, which Wood said “bodes well for growth”.
The availability of secured credit to households increased to a score of 36.9 in the third quarter, the highest since mid-2021, with a strengthened outlook for the next quarter.
Richard Pinch, senior director at the independent financial services consultancy Broadstone, said the latest data “points to an encouraging fall in default rates and a boost in the availability of household credit”.
However, he warned that expected tax rises in the November Budget, where chancellor Rachel Reeves will need to fix a hole in the public finances estimated at between £20bn and £30bn, could “rock household confidence”.
Demand for corporate lending is expected to increase in the next three months across small, medium and larger companies, the survey showed.
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