Borrowers looking to take out a mortgage with a small deposit could find it more difficult to get a loan in the coming months, a new survey from the Bank of England suggests.
According to the Bank’s latest quarterly credit conditions survey, lenders expect mortgage availability to fall in the coming months, affecting borrowers with smaller deposits the most.
Banks and building societies expect mortgage availability to fall slightly over the next three months to mid-September, reflecting a changing appetite for risk.
A slight reduction in mortgage availability is expected to affect only borrowers with deposits less than 25% and in particular those with deposits below 10%.
The survey also revealed default rates on credit cards and personal loans are on the rise, with the availability of credit expected fall over the next few months.
The Bank said that default rates on credit cards “increased significantly” in the second quarter, with rates expected to rise in the next three months.
The news comes at a time when households are beginning to feel the pinch as their disposable incomes start to fall due to rising inflation and slowing wage growth.
Since last year’s Brexit vote, consumers have also faced a loss in spending power as a result of rising inflation following a fall in the pound.
Credit scoring criteria for credit cards and other unsecured loans were also reported to have tightened again.
Banks and building societies also anticipate the length of interest free periods on balance transfers to fall, for the first time since 2015.
Howard Archer, chief economic adviser to the EY ITEM Club, said that due to concerns over the risks to the UK economy from increased consumer borrowing, the Bank would likely take “limited comfort” from the survey.
Archer said: “The Bank of England will likely see the report as indicating that lenders are moving in the right direction in their lending to consumers, but that pressure must be maintained on banks to act responsibly especially given the weakened economic outlook and squeeze on consumers’ finances.”
The Bank confirmed last week that it was tightening its mortgage affordability rules.
In its latest Financial Stability Report the Bank said lenders will now be required to check that a borrower can pay back their loan at a rate of 3% above the standard variable rate.
Under the previous rule introduced in 2014, banks and building societies would test borrowers by checking how they would react to an increase of 3% above the base rate.
With the average standard variable rate above 4%, this means borrowers could have their affordability tested at a rate higher than 7%.
“The Bank of England wants banks to provide evidence that they are lending responsibly to consumers and have not become complacent, but has stopped short of tightening borrowing controls,” Archer said.
“Lenders and consumers both need to take on board the increased possibility that the Bank of England could shortly raise interest rates. While any interest rate hike would be small with further increases some way off, even small increases could cause problems for many consumers given high borrowing levels.”
The Bank also told Britain’s lenders that they must set aside £11.4 billion of capital in the next 18 months to make them more resilient to the risk of rising consumer debt.
It said it would increase the counter cyclical capital buffer from 0% to 0.5% and suggested this will likely go up to 1% in November.
Loading ...