The demand for loans is expected to increase just as banks slow down their lending and prepare for a wave of bad debts, according to a Bank of England survey.
The availability of mortgages and unsecured debt, such as credit cards and personal loans, is likely to decrease in the coming weeks, lenders told the Bank in its Credit Conditions Survey.
The survey for the second quarter of the year was carried out between June 1 and June 19, before the chancellor announced a temporary stamp duty cut for buyers of homes in England and Northern Ireland.
Since that announcement last week, there have been signs of banks’ appetite for low-deposit mortgage lending returning, with some new offers being announced, including a handful of 90 per cent loan-to-value deals. That marked a return of modest confidence after May, when lenders withdrew most mortgages for first-time buyers that required only a 5 per cent deposit.
Mark Harris, chief executive of SPF Private Clients, a mortgage broker, said: “The stamp duty holiday is a welcome boost to the market.”
However, there are still deep-seated worries about borrowers’ ability to repay and as a consequence loans are about to become scarcer and more expensive, the survey found.
Lenders are concerned about thousands of customers who have opted for payment freezes on mortgages, credit cards and other loans. Both banks and debt charities are worried about the build-up of debt, with interest accruing on some of those products.
Banks and building societies fear that customers will have to restart payments just as their jobs are coming under threat. Unemployment has risen by 649,000 since the start of lockdown and is expected to rise further as employers start paying into the furlough scheme from August and again as it officially ends in October.
Lenders’ nervousness will be reflected in an increased number of rejected credit applications, the survey found. There was a huge rise in demand for loans from businesses of all sizes in the second quarter, but that is set to fall in the third quarter. Default rates on corporate loans are expected to rise.
A group of City figures led by The City UK, the advocacy group, estimated that businesses may build up £100 billion of debt by next March which they would be unable to repay. In a report published on Wednesday, they called for the loans to be nationalised and for smaller ones turned into a student loan-style system of repayments based on affordability. Bigger loans of up to £1 million could be converted into preferred shares or long-term subordinated debt, which may attract the interest of investors such as insurers and pension funds, the group said.
If the government did not act swiftly, three million jobs could be at risk, with 780,000 small and medium-sized businesses in danger of insolvency, according to the analysis.
At present, banks are obliged to try to collect the loan repayments and only if that fails can they claim on the government guarantee, which stands at 100 per cent on bounce back loans, aimed at small businesses, and 80 per cent on coronavirus business interruption loans, for bigger companies.
