Lenders expect property market boost – but credit wobbles are already emerging
Experts warn that loan default rates are rising but the real impact on households is yet to come as consumers brace for price increases due to the Iran war.
The Bank of England’s latest Credit Conditions Survey, which measures demand for new borrowing, shows the default rate on loans rose to 6.2 per cent from January to March.
There were virtually no mortgage defaults in the previous quarter, lenders say. Figures show that consumers were feeling this pressure even before the Iran war as the economy stagnated.
Karim Haji, Head of Global and UK Financial Services at accountancy firm KPMG, said: “Rising default rates show that fundamental pressure is increasing. “The impact of the protracted conflict on fuel prices is putting new pressure on household finances, with the full impact of higher costs and mortgage rates still lingering.”
However, experts say that demand in the mortgage and real estate market is expected to increase in the coming months.
For secured loan defaults, including mortgages, the Bank recorded 6.2 per cent in the first quarter of 2026, the highest figure since the last three months of 2024 (7.8 per cent), when the UK saw multiple increases in interest rates. Data for the first three months of 2026 marked a reversal from the decline in defaults reported in the last six months of 2025.
The bank reported a fourth consecutive quarter of rising delinquencies on unsecured loans such as credit cards (18.6 percent in the first quarter of 2026). This was the highest figure since the last quarter of 2023 (25.7 percent).
Demand for home loans and other loans remained high as borrowing costs fell before the Iran war, according to the bank.
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Lenders expected demand to continue rising as interest rates fell, but that may have changed as borrowers’ optimism waned or they were forced to refinance mortgages at higher rates when fixed-rate deals expire.
Mr. Hadji added: “Stable demand for unsecured loans shows that households are turning to credit to manage their increasing day-to-day expenses. While some borrowers are still able to access credit, others are struggling to make repayments, indicating possible early stages of credit deterioration.”
Bond yields, which the government pays as interest on borrowing and is linked to mortgage prices, have fallen this week following the ceasefire.
The Bank of England’s Credit Conditions Survey reveals that alongside credit fluctuations, lenders expect demand for mortgages to rise in the coming months.
Damien Burke, Head of Regulatory Practice at consultancy Broadstone, said: “The latest Loan Conditions Survey reveals a cautiously improving outlook for the mortgage market at the start of the year, with lenders expecting demand, particularly for home purchases and remortgages, to increase in the coming months. This reflects a degree of subdued demand as homebuyers await lower interest rates and a more certain financial landscape.”
However, the research was conducted just as the Middle East conflict began. Brokers warn that the longer this goes on, the worse the blow to borrowers and lenders will be.
Raj Abrol, CEO of risk platform Galytix, said: “What started as a conflict in the Middle East is now manifesting itself in borrowing costs across the economy. Mortgage rates have risen from 4.8 per cent to over 5.5 per cent, which is an extra £1,000 a year on a typical £200,000 mortgage. The ongoing turmoil of the Iran crisis has spooked many of the big banks, causing mortgage rates to rise and pressure to increase. In this complex environment, The rise in defaults could continue for months as inflation persists and the cost of living crisis worsens. The longer this uncertainty lasts, lenders will remain risk averse and access to credit will become a greater challenge for consumers.
Cost of short-term borrowing for companies He also jumped. When credit becomes more expensive, it hurts businesses’ payroll financing, small- and medium-sized business refinancing, and consumers whose credit cards and car loans are quietly reset to higher levels. Risk experts warn that, with one million fixed-rate mortgage deals expiring by September and inflation heading towards 3.5 per cent, the longer this goes on, the more defaults will slow down to something banks will need to take seriously.
Mr Burke adds: “The effects of the conflict in Ukraine on inflation and mortgage rates remain fresh in the minds of households, and even short-term disruptions to supply chains can have a long-term impact on the cost of goods. This further increases the need to understand consumers’ individual affordability when considering credit products.”
