Lenders set to tighten approvals and default rates poised to rise, report warns

Households and businesses will find it tougher to get loans in the coming months as default rates are poised to increase, a survey of lenders suggests.

The Bank of England’s credit conditions survey of banks and building societies, carried out in September, found lenders anticipate they will tighten their credit scoring criteria in the months ahead.

Many temporary measures have been put in place by lenders to help cushion the financial shock of the coronavirus crisis for customers.

But there have also been signs that lenders are becoming warier about offering risker loans, with the number of low deposit mortgages on the market having reduced dramatically since the lockdown started.

One mortgage professional commenting on the report said some first-time buyers increasingly feel their chance of getting a home loan is “somewhere between slim and zero”.

The report said that while lenders expect mortgage availability to remain unchanged over the three months to the end of November, credit scoring criteria had tightened in the previous three months and is expected to tighten further in the coming quarter.

This indicates some households will have higher hurdles to clear to get a mortgage.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Borrowers who have found it harder to get a mortgage will not be surprised to hear that lenders tightened criteria in the third quarter and expect to tighten further in the run-up to the end of the year.

“Concerns about the impact of the pandemic on earnings and what will happen to property prices, particularly for those borrowing at high loan-to-values, is behind this growing caution.

“Mortgage pricing is on the rise, a trend expected to continue over the course of the rest of the year.”

Andrew Montlake, managing director at mortgage broker Coreco, said: “In some cases lenders are already raising rates to stave off demand…

“We’re now starting to see demand for mortgages drop off at higher loan-to-values, as first-time buyers with small deposits are increasingly aware that the chance of getting a mortgage agreed are somewhere between slim and zero.

“It’s a travesty that so many first-time buyers will now miss out on the stamp duty holiday introduced over the summer.

“We all know the economic pain that’s in the post so it’s no real surprise that the banks are pulling down the shutters for those with smaller deposits.

“What we need to avoid, however, is banks catastrophising and pulling products for more robust borrowers at lower loan-to-values.”

The report also found credit scoring criteria for non-mortgage lending to households, such as credit cards and personal loans, also tightened and a further squeeze is expected.

This could come at a time of rising demand, as the report said lenders believe demand for both credit cards and other non-mortgage lending will increase over the next quarter.

Lenders also reported the overall availability of credit to the corporate sector increased slightly in the third quarter of 2020, rising for small and medium businesses but decreasing slightly for large firms.

Overall availability is expected to decrease in the fourth quarter.

Looking at demand for loans among businesses, this is expected to decrease for small and large firms in the fourth quarter but increase slightly among medium-sized firms.

The report also said lenders think mortgage default rates will increase in the fourth quarter, as will defaults on non-mortgage lending to households.

Defaults are also expected to increase for businesses of all sizes in the next few months.

The Bank of England carries out the credit conditions survey each quarter as part of its mission to maintain financial stability. Lenders’ views are not necessarily in line with those of the Bank.

The latest survey was carried out between September 1 and 18 and so does not capture the impact of any Government announcements since then.

Sarah Coles, personal finance analyst, Hargreaves Lansdown, said those keen to get back to borrowing are “in for a nasty surprise”.

She said: “So far, banks have mainly focused on the risk that the wider economic picture is going to get worse. For credit card and loan companies, this is still their biggest worry. However, for mortgage companies, it has been overtaken by concerns about the future for house prices this autumn.

“This doesn’t bode well for home movers. Estate agents say it’s already tough to get a mortgage, and difficult to keep a lender onside during the ups and downs of a home move.

“With the market tightening, and lenders increasingly sensitive to house price moves, it could make life even harder as we get towards the end of the year.”