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Friday, May 09, 2025

Higher risk of households defaulting on loans as Bank warns of worsening financial conditions

Higher risk of households defaulting on loans as Bank warns of worsening financial conditions

The average mortgage repayment is to increase by £250 a month and to 17% of the average pre-tax income, the Bank of England said as it revealed plans for a new stress test in the wake of the September mini-budget market meltdown.
"Significant pressure" will be placed on the ability of households to meet their debts, the Bank of England has said in its latest health check of the UK's financial system.

Its Financial Stability Report, published on Tuesday morning, warned that economic conditions had deteriorated.

It also revealed plans for a stress test covering investment funds and other non-bank financial institutions next year in the wake of the September mini-budget market panic that hit investment funds crucial to the pension sector.

"The risk that indebted households will default on loans, or sharply reduce their spending, has increased," the report said.

That pressure will increase into next year, the report forecast, as inflation and higher interest rates bear down on consumers.

Contributing to difficulties for households are falling real incomes, the increased cost of mortgages and higher unemployment, the Bank said.

Four million households are to have more expensive mortgages next year and two million will have higher payments by the end of 2025, it suggested.

The average increase in mortgage payments will be £250 a month, the Bank expects.

Repayments will rise from £750 to £1,000 a month on average, rising to 17% of the average pre-tax income from the current 12%.

While it represents a large rise in income spent on mortgages, the Bank said households were better off than before the global financial crash of the late 2000s and the recession of the 1990s as a lower proportion of disposable income is spent on mortgage repayments.

Despite the financial hardship, the Bank was confident there were no widespread signs of financial difficultly for households.

It said arrears remained low and that only 20% of mortgage-holders were on variable rate mortgages, more susceptible to interest rate fluctuations.

Banks also have capacity and resilience to deal with any coming recession with sufficient capital reserves, the Bank said.

That will be the case even if economic conditions are worse than currently forecast, it added.

There's evidence, the Bank said, that the major UK lenders are tightening lending standards as their appetite for lending to riskier borrowers lessens.

Also revealed by the Bank was a forthcoming stress test of the non-bank sector of lenders.

The Bank will become the first regulator to do so despite half of global lending being done via such lenders.

Details of the stress test are not yet fully formed but officials have started a scoping exercise to identify what institutions and groups will come under the purview of the stress tests, which examine resilience of lenders to weather economic, political and environmental shocks.

It was shortly after then-chancellor Kwasi Kwarteng's mini-budget in September that the Bank had to intervene to prop up liability-driven investment funds, used by pension funds to ensure their long-term payouts, as they struggled to meet collateral calls as bond prices tumbled.

Stress testing of banks in the UK began in 2013 in the wake of the global financial crisis.

The rate of inflation is tipped to ease from its current 41-year high of 11.1% on Wednesday when the Office for National Statistics releases figures covering November.

Nevertheless, the Bank rate is forecast to rise from its current level of 3% to 3.5% in a further bid to bear down on rising cost pressures in the economy, including from wage growth.
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