Lenders expect more households ‘to default on mortgages in next few months’

More households are expected to default on their mortgage payments and other loan commitments in the next few months, according to a Bank of England survey of lenders.

Default rates on mortgages and other types of non-mortgage lending such as credit cards and personal loans are predicted by banks and building societies to increase in the first quarter of 2021, the Bank’s Credit Conditions Survey found.

Lenders also reported that the lengths of interest-free periods on credit cards for balance transfers decreased in the final months of 2020, and were expected to decrease slightly in the next few months.

The survey was carried out from November 23 to December 11 2020.

Struggling homeowners still have time to apply for mortgage payment holidays and figures released by UK Finance this week show 130,000 mortgage deferrals were in place at the end of December 2020, which is down from a peak of 1.8 million in June 2020.

The deadline to apply for a mortgage payment holiday is March 31 2021.

With payment holidays needing to end by July 31 2021, those wanting to take the maximum holiday of up to six months are being urged by UK Finance to apply before their February mortgage payment is due.

Sarah Coles, personal finance analyst at Hargreaves Lansdown said: “Some homeowners have worked through the pandemic with their income unscathed, but enormous numbers saw their income cut as they lost work or went on to 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.

“They are also expecting more defaults on credit card and loan payments, and are shortening balance transfer periods, to avoid people carrying unaffordable debts for longer.

“Those who have been more insulated from the effects of the pandemic, meanwhile, have had a dramatically different experience over the past nine months.

“Those with plenty of cash are confident about putting more on plastic, and the banks expect shoppers to apply for more unsecured borrowing in the first three months of the year.

“They’re also likely to be able to take advantage of cheaper mortgages filtering into the market in early 2021, and the banks are expecting demand for re-mortgages to rise again.”