Nationwide Building Society is bracing itself for a rise in bad loans and a drop in mortgage lending as borrowers grapple with the impact of surging living costs and a long recession.
The UK’s second largest mortgage lender said that while few borrowers had fallen behind on loan payments so far, it had put aside £108m to cover potential defaults in the first half of the year. That compares with the £34m it released due to improving conditions during the same period in 2021, when the country was recovering from the Covid pandemic.
While Nationwide assured that a “significant proportion” of its borrowers were on fixed-term mortgages, and a relatively low number of customers were spending a large portion of their income to repay debts, it said higher interest rates, rising inflation and the uncertain economic outlook “remain key risks”.
“The transition to higher interest payments is a challenge for households as they adjust their expenditure priorities”, Nationwide said. It pledged to support borrowers struggling to repay their debts, and it warned that “an increase in arrears from current levels is expected”.
Forecasts released alongside the government’s autumn statement on Thursday showed that GDP would probably contract by 1.4% next year, and that overall living standards would fall by 7% over the next two years, in effect reversing the past eight years of growth.
The building society said it was poised to support struggling customers, but the amount of financial help it had provided to borrowers was still quite low. Forbearance for the period totalled £1.3bn, accounting for about 0.6% of its £203bn loan book.
“While there’s a lot of concern about the future, and it’s very uncertain, the arrears and forbearance are not showing any significant change at all,” said the chief executive, Debbie Crosbie.
However, Nationwide said surging living costs and interest rates would squeeze household finances and consumer confidence, leading to lower mortgage lending during the second half of the financial year.
The biggest impact will be felt in the buy-to-let mortgage market, where lending has already fallen 75% and is unlikely to make a swift recovery. Executives said it could spell trouble for renters who did not have the means to get on to the property ladder and would have to compete for a smaller number of rentals.
“One in five people are relying on private rental for their accommodation,” Crosbie said. “And if you get a lot of people coming out of that buy-to-let market over the medium term, I think that’s going to be quite problematic.”
The chief financial officer, Chris Rhodes, explained that when prospective landlords took rising interest rates into account and weighed that against rental income and expenses, they were “not making a lot of money at all”.
“It doesn’t look like a great investment any more,” he added.
Long-term interest rates surged last month in reaction to Kwasi Kwarteng’s mini-budget, which spooked markets and increased borrowing costs. While rates have gradually fallen, average fixed mortgage rates are still hovering at about 5%.
Nationwide said it was passing those rates on to customers fairly by offering competitive saving rates and giving existing borrowers access to mortgages with interest rates below 5%.
Overall, rising income from higher interest rates helped boost the building society’s half-year profits by 13% to £969m.