Building society says it anticipated relatively few of its customers to fall behind on repayments in cost of living crisis
Nationwide Building Society is preparing itself for an increase in bad loans and a fall in mortgage lending as borrowers struggle with the impact of rising living costs and a long recession.
The UK’s second biggest mortgage lender said that while few borrowers had not kept up with loan payments so far, it had set aside £108m to cover possible defaults in the first half of 2022. That compares with the £34m it released thanks to improving conditions during the same period last year, when the country was bouncing back from the Covid pandemic.
While Nationwide assured that a “significant proportion” of its borrowers were on fixed-term mortgages, and a comparatively small number of customers were spending a huge portion of their income to pay off debts, it said soaring inflation, higher interest rates, 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 promised to support borrowers grappling to pay off their debts, and it cautioned that “an increase in arrears from current levels is expected”.
Forecasts announced together with the government’s autumn statement on Thursday showed that GDP would potentially shrink by 1.4% in 2023, and that the overall living standards would drop by 7% over the next two years, in effect undoing the past eight years of growth.
The building society said it was prepared to support struggling customers, but the amount of financial assistance it had given to borrowers was still quite small. Forbearance for the period amounted to £1.3bn, composing about 0.6% of its £203bn loan book.
The chief executive, Debbie Crosbie, said:
“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”
However, Nationwide said rising living costs and interest rates would hurt household finances and consumer confidence, resulting in lower mortgage lending during the second half of the financial year.
The greatest impact will be experienced in the buy-to-let mortgage market, where lending has already dropped 75% and is unlikely to make a quick recovery. Executives said it could cause problems for renters who did not have the means to climb the property ladder and would have to compete for a limited number of rentals.
Crosbie added:
“One in five people are relying on private rental for their accommodation. 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 into consideration increasing interest rates and compared that against rental income and expenses, they were “not making a lot of money at all”.
Buy Bitcoin Now“It doesn’t look like a great investment anymore,” he added.
Long-term interest rates rose in October in reaction to Kwasi Kwarteng’s mini-budget, which spooked markets and lifted borrowing costs. While rates have continually fallen, average fixed mortgage rates are still hovering at around 5%.
Nationwide said it was transferring those rates on to customers moderately by offering competitive saving rates and allowing existing borrowers access to mortgages with interest rates lower than 5%.
Overall, increasing income from higher interest rates helped push the building society’s half-year profits by 13% to £969m.
