UK SMB Loan and Mortgage Defaults on the Rise

The Bank of England (BoE) has reported an increase in small businesses defaulting on loans.

In the findings of a survey of lenders in the U.K., the BoE found that default rates across most forms of lending remained stable in Q4 2022. The one exception, however, was small business loans, which saw an increase in defaults toward the end of last year. A less notable increase was observed in loans to medium-sized businesses while the default rate for loans to large enterprises remained unchanged.

The news comes at a time when small and medium-sized businesses (SMBs) are facing a sharp increase in the cost of borrowing following a series of interest rate hikes in the U.K.

As the BoE previously reported, the average cost of borrowing for SMBs has nearly doubled from a rate of 2.5% rate at the end of 2021 to 4.7% in 2022.

Since 2019, the bank reports that total outstanding SMB debt has increased by around 20%, while the proportion of SMB debt in arrears increased from 2% to 2.4% throughout 2022.

Things aren’t much better for homeowners either. As PYMNTS has reported, the cost of U.K. mortgage repayments has hit a 15-year high, with first-time buyers in the country spending on average 39% of their take-home pay on mortgage payments.

To help prevent a wave of mortgage defaults, the U.K.’s largest lenders, including Barclays, HSBC,  Lloyds, Nationwide, NatWest Group, Santander and Virgin Money, have agreed on measures to help struggling borrowers.

Support measures could include extending the terms of mortgages to make monthly payments lower, a short-term reduction in monthly payments and accepting interest-only payments for a period.

Going forward, the BoE forecasts that bad debt will continue to rise in 2023 and in Thursday’s report said that it expects the default rate on all types of loans it tracks to increase.

Lenders also reported that the availability of secured and unsecured credit to households decreased in the fourth quarter of 2022, a trend they expect to continue.

The overall availability of credit to businesses was unchanged in Q4 but is expected to slightly decrease in Q1 2023, the report notes.

For all PYMNTS EMEA coverage, subscribe to the daily EMEA Newsletter.