The National Building Society is preparing for an increase in bad loans and declining mortgage loans as borrowers grapple with the impact of the rising cost of living and a prolonged recession.
The UK’s second largest mortgage lender said that while few borrowers had defaulted on loan payments so far, it had set aside £108m to cover potential defaults in the first half of the year. This compares to the £34m released due to improved conditions during the same period in 2021, when the country was recovering from the Covid pandemic.
While Nationwide emphasized that a “significant proportion” of borrowers were on term mortgages, relatively few customers were spending a significant portion of their income to pay off debt, higher interest rates, rising inflation and an uncertain economic outlook “remain major risks”.
“The transition to higher interest payments is challenging for families as they adjust their spending priorities,” Nationwide said. While she pledged support for borrowers struggling to repay their debts, she warned that “arrears are expected to increase from current levels”.
Projections issued alongside the government’s fall statement on Thursday showed gross domestic product likely to contract by 1.4% next year, and overall living standards to fall by 7% over the next two years, effectively eliminating the growth over the past eight years.
The Building Society said it was ready to support distressed clients, but the amount of financial assistance it provided to borrowers was still very low. The total forbearance for the period was £1.3 billion, which was about 0.6% of its loan book of £203 billion.
“While there is a lot of anxiety about the future, which is very uncertain, the arrears and the patience show no significant change at all,” said chief executive Debbie Crosby.
However, Nationwide said rising costs of living and interest rates would put pressure on household finances and consumer confidence, leading to lower mortgage lending during the second half of the fiscal year.
The biggest impact will be in the mortgage market, where lending has already fallen by 75% and is unlikely to make a quick recovery. Executives said that could cause a problem for tenants who do not have the means to get onto the property ladder and would have to compete for fewer rents.
“One in five people depend on private renting for their accommodation,” Crosby said. “And if you have a lot of people exiting the buy-to-let market in the medium term, I think that’s going to be a big problem.”
CFO Chris Rhodes explained that when prospective landlords factored in high interest rates and weighed that against rental income and expenses, they “didn’t make much money at all.”
“It doesn’t seem like much of an investment anymore,” he added.
Long-term interest rates rose last month in response to ex-adviser Kwasi Quarting’s micro-budgeting, which rattled markets and drove up borrowing costs. And while rates have gradually declined, average fixed mortgage rates still hover around 5%.
Nationwide has ensured that it passes these rates on to customers fairly by offering competitive savings rates and giving existing borrowers access to mortgages at interest rates as low as 5%.
Overall, higher income from higher interest rates helped boost Building Society’s semi-annual earnings by 13% to £969m.