Reported defaults on mortgage loans sharply increased in the first quarter of the year as the conflict in the Middle East continues, research from the Bank of England has found.
The latest Credit Conditions Survey, showed that respondents reporting secured lending defaults, which includes mortgages, increased to 6.2 per cent between January and March.
These are the highest rates since the final quarter of 2024 when 7.8 per cent reported defaults following several rises in UK interest rates.
Explaining this rise, Galytix CEO, Raj Abrol, attributed it to the conflict in the Middle East impacting borrowing costs across the economy.
“Mortgage rates have jumped from 4.8 per cent to over 5.5 per cent — that’s an extra £1,000 a year on a typical £200,000 mortgage,” he said.
“The ongoing turmoil of the Iran crisis has spooked many of the big banks, leading to a surge in mortgage rates and increased pressure on homeowners.
“Against this complex backdrop, a rise in defaults could well continue for many months as inflation persists and the cost of living crisis worsens.”
Abrol said the real concern for the market is “what’s happening underneath” as the cost of short-term corporate borrowing has more than doubled for lower-rated firms since late February.
Similarly, investment-grade credit spreads have widened 15 basis points, and UK gilt yields have hit 5 per cent for the first time since 2008.
“When credit gets more expensive across the board, it doesn’t just hit homeowners,” said Abrol. “It hits businesses funding payroll, SMEs trying to refinance, and consumers whose credit cards and car loans quietly reset higher.”
The Bank’s research also found that reported unsecured lending defaults, such as credit cards, rose for the fourth consecutive quarter in the first three months of the year.
In Q1, respondents recording unsecured defaults reached 18.6 per cent, the highest this figure has been since the final quarter of 2023 when it reached 25.7 per cent.
Meanwhile, the reported default rate on loans to corporates were unchanged for small, medium, and large businesses in Q1.
Acting Office CEO, Kenny MacAulay, added: “As the Iran crisis rumbles on, surging inflation and higher rates will heap fresh misery on homeowners and businesses alike.
“In tough times, doubling down with extra reserves and savings is critical for avoiding defaults, especially with the UK’s wider economic outlook stagnating.”
tom.dunstan@ft.com
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Edit: This article has been edited to reflect that the Bank of England’s research refers to reported rates of defaults rather than, as previously reported, default rates.