Mortgages and other loans are set to become harder to find over the coming months as the coronavirus pandemic causes banks to pull back from lending.
Experts fear the UK could be heading for another credit crunch as lenders are becoming more reluctant to get money out of the door, despite demand from households and businesses.
Banks predict that loans will become scarcer, costlier and riskier over the next few months, according to a Bank of England survey.
Experts fear the UK could be heading for another credit crunch as lenders are becoming more reluctant to get money out of the door, despite demand from households and businesses
This will pile pressure on home buyers who are seeking a mortgage, or households that have suffered from pay cuts or job losses and need a loan to help make ends meet.
It will also squeeze businesses which have struggled during lockdown, and want to borrow money to help tide them over until they are running at full capacity.
In the Bank of England’s latest Credit Conditions Survey, for the three months to May 31, lenders said the supply of secured loans such as mortgages to households had slumped.
They expected this to get worse over the next three months, even though they predicted demand would increase.
The picture was even more grim for unsecured lending, such as personal loans and credit cards.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: ‘Since we were hit by the Covid crunch, lending has dried up faster than it did during the financial crisis – and things are only going to get worse.
‘In the three months to May, worried banks tightened their lending criteria.
‘It became much more difficult to get a mortgage with a small deposit, credit card companies slashed credit limits, and interest-free periods shrunk.
Housing’s brief reprieve?
The housing market roared back to life in June as a record number of offers were accepted, according to research.
After months of sluggish activity during the coronavirus lockdown, estate agent Knight Frank said it had recorded the best month for successful offers.
The figure for last month was 46 per cent higher than the previous record, in March this year before the lockdown.
Knight Frank – who’s data goes back 20 years – said this underscored ‘how the property market has picked up where it left off before the pandemic struck’.
Tom Bill, Knight Frank’s head of UK residential research, added: ‘Sellers are coming back in meaningful numbers and deals are being agreed at record rates.’
‘It goes to show just how worried banks are about the state of the economy, and what could happen to jobs and house prices.’
Pablo Shah, senior economist at the Centre for Economics and Business Research, added: ‘Consumer credit dried up in the second quarter, with lenders’ assessments of unsecured credit availability falling to their weakest ever level.
‘With unemployment projected to spike as the furlough scheme is wound down, default rates are also expected to rise, suggesting we could be approaching a credit crunch towards the end of the year.’
The proportion of consumers defaulting on their loans, or becoming unable to pay back the debt, was already on the rise in the three months to May.
And earlier this week, Treasury body, the Office for Budget Responsibility (OBR), warned as many as 1.9m of the UK’s 9.4m furloughed workers may not get their jobs back, raising the prospect of even more defaults.
The gloomy outlook has deterred banks from handing out loans, as they attempt to bolster their own books in the face of the economic downturn.
The picture was mirrored across corporate loans, where default rates are also rising.
The OBR has predicted that 40 per cent of small companies who have taken emergency taxpayer-backed loans under the Government’s Bounce Back scheme could end up defaulting.
The default rate for other schemes, such as the Coronavirus Business Interruption Loan Scheme, is likely to be lower.
But they will still leave banks with a chunk of bad debt sitting on their books.
A report from lobby group The City UK and accountant EY has suggested the Government set up a UK Recovery Corporation to help prevent toxic debt from holding back the country’s economic recovery.
Businesses which took emergency loans, but become unable to pay them back, could apply to be part of the corporation, the report said.
Depending on their size and prospects, they could then either repay the loan more slowly as a tax on their profits, or have the government-backed debt converted into special financial instruments such as preference shares.
Fast-growing businesses, meanwhile, could take investment from a scaled-up national growth fund.
The City UK, which has been consulting on its proposals with the Treasury and the Bank of England, thinks that 3m jobs could be lost as a result of unsustainable business debt if no steps are taken.
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