Banks set to reign in lending as economic outlook darkens since September’s mini-budget

Lenders expect the availability of mortgages and consumer and corporate credit to shrink as more people and businesses default on loans.

Rising interest rates and the worsening economic outlook began to affect the demand for credit and its availability even before the turmoil unleashed in the markets by the government’s mini-budget at the end of September, according to research by the Bank of England.

The survey of lenders, conducted between August 30 and September 16, found that the availability of mortgage credit to households rose from -22 per cent to -13 per cent on its sentiment index between July and September, but expectations for the availability of credit over the next three months fell to a balance of -40.9 per cent.

The deteriorating economic outlook, the possibility that house prices will fall and a lower appetite for risk were the main reasons behind lenders’ plans to rein in lending in the final quarter.

Last month house prices rose at their slowest since early in the pandemic. They now look on course to fall as a surge in mortgage costs puts pressure on spending, according to the monthly survey by the Royal Institution of Chartered Surveyors. Inquiries among new buyers ranked among the lowest 5 per cent of readings since the survey began.

Arrears are also beginning to rise as households struggle to make ends meet amid inflation at nearly 10 per cent. The net balance for the default rate rose from -7.6 per cent to 7 per cent and is expected to increase further.

The net percentage balances are calculated based on whether lenders gave a positive or negative response to a question and are weighted based on their market share to give a figure between -100 per cent and 100 per cent.

At the time of the survey, markets had priced in a 4.4 per cent peak in interest rates. The forecast has since risen to 5.9 per cent after a series of unfunded tax cuts announced by the chancellor, Kwasi Kwarteng, prompted a sell-off of UK assets and drove the pound to a record low of $1.03 last month.

Andrew Wishart, senior property economist at Capital Economics, said the rise in remortgaging reflected a rush among borrowers to lock into lower interest rates before they rise further.

The Bank of England has implemented six back-to-back rate rises, taking the base rate from a historic low of 0.1 per cent in December last year to its current level of 2.25 per cent. Another rate rise is expected at the next meeting of the central bank’s monetary policy committee on November 3.

The average quoted rate for a two-year fixed-rate mortgage with a 75 per cent loan-to-value ratio hit 4.17 per cent in September, up from 1.64 per cent at the turn of the year, according to separate data published by the Bank.

“Even before the latest leg-up in mortgage rates, demand for borrowing for house purchase was dwindling with the net balance dropping from +30.4 [per cent] in Q2 to -36.5 in Q3,” Wishart said. “That was driven by lower owner-occupier demand while buy-to-let demand was more resilient.”

He added that expectations for the availability of credit for commercial property were at their lowest since summer 2020. The outlook will have since worsened, given the surge in gilt yields following the mini-budget.