Interest rates

Banks tighten mortgages as interest rates rise

UK property: Demand for consumer credit is expected to increase by 7.2% this year, due to the worsening cost of living and inflationary pressures. Photo: May James/Reuters

Banks are expected to tighten mortgage lending for UK property as they battle higher interest rates, a riskier economic outlook and market volatility.

The forecast for mortgages in Britain is expected to rise by 4% this year, but slow to just 0.7% in 2023 thanks to rising interest rates and falling real income.

According to EY’s Item Club Outlook for financial services, this will be the lowest level since 2011 in the aftermath of the financial crisis.

Consumer credit demand is expected to increase by 7.2% this year, due to the worsening cost of living and inflationary pressures. But this high rate is unlikely to persist, and as inflation recedes and pressure on real household incomes eases, the growth rate is expected to slow to 5.1% in 2023.

This represents a reversal from the pandemic period when demand fell by more than 10%.

Meanwhile, corporate lending is also expected to rise by 2.2% this year, but fall by 3.5% in 2023 as UK businesses’ appetite and ability to invest is affected by the deteriorating economic outlook and rising interest rates.

This would be the first drop in six years, but less severe than the average annual drop of 7.2% between 2009 and 2012 during and after the financial crisis.

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Unlike 2021, when many UK businesses focused on paying down pandemic debt, this year has seen a return to growth in borrowing, especially by large corporations, the data shows.

But the 2.4% average growth in the eight months to August was low by pre-pandemic standards, where annual growth averaged 5.2% in 2018 and 2019.

It comes as overall housing market activity has remained fairly buoyant this year, in part because buyers have been looking to secure low-rate deals, with mortgages expected to net £63bn.

Real incomes are also expected to see the biggest annual decline since the 1970s.

“Geopolitics and the deterioration of the economic environment have a significant impact on households and businesses. Although interest rates are still quite low by historical standards, they are the highest they have been in a decade and are expected to rise further,” said Anna Anthony, UK managing partner of financial services at EY.

“This will put further pressure on already strained finances and have a knock-on effect on demand for most forms of bank loans next year as potential homeowners postpone purchases and businesses suspend investment.

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He added: “Affordability is tight and mortgage and business lending is expected to slow at a pace similar to that seen after the financial crisis. The main difference now is that tighter regulation and higher solvency levels mean banks are well capitalized and much better able to support customers through this difficult time.

“Another crucial difference is that many consumers enter this period with a financial cushion in the form of savings accumulated during the pandemic, and businesses that entered into government-backed loan programs during COVID-19 remain on fixed rate terms at relatively low interest rates.

“All of this means consumers and businesses are better positioned than they were over a decade ago, and banks are better able to support them.”

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Meanwhile, EY said it does not expect levels to rise above the peaks seen during the financial crisis as tighter regulation and cost savings will help cushion the impact for consumers, while For businesses that have taken on debt during the pandemic, low interest rates, fixed-rate government-secured loan schemes will help keep repayments manageable.

Impairments on mortgages are expected to rise from 0.02% in 2022 to a nine-year high of 0.05% next year. This figure remains below the peak of 0.08% reached in 2009. In 2024, it is expected to fall to 0.04%.

Cancellation rates for personal loans and credit cards are expected to be 1.9% this year, rising to 2.5% next time – the highest level since 2012, although half of the 5% peak reached in 2010. In 2024, cancellations are expected to drop to 2.2%.

Impairments on corporate loans are expected to reach 0.7% in 2023, almost double the 0.4% of the previous year. But again, this would still be a long way from the 1% to 1.5% rates at the start of the 2010s. In 2024, depreciations should fall back to 0.4%.

Watch: Will UK house prices ever drop?