Mortgage defaults are expected to spike over the next year, creating losses for specialist lenders of up to £760m according to new research.

Analysis of the financial statements of 10 of the UK’s largest specialist lenders found that they are accounting for a 22% increase in expected credit losses, as homeowners struggle to meet mortgage repayments in the higher interest rate environment. 

This expected credit loss (ECL) figure from these lenders is predicted to hit £760m according to this AI-powered research — an increase on the £625m losses accounted for the year before. 

Seven of these specialists lenders are braced for more significant losses, with more than a 10% increase in their ECL provision compared to the year before. Just one specialist lender — Bank of Ireland — reported a reduction in ECL allowance.

Recent research from transactional analytics firm Fuse — which conducted this survey — found that total ECL provision from the UK’s 20 largest lenders exceeded £19bn,  an increase of £788 million in the £18.3bn allowance from the previous year.

This research follows data from the the Financial Conduct Authority (FCA) showing that around 1.5m fixed-rate mortgage deals will expire this year, with homeowners facing a significant jump in mortgage costs due to the higher cost of borrowing. 

Figures from the Bank of England show there have been a 9.2% rise in arrears in the last quarter of 2023, compared to the previous three months, and a 50% increase in arrears year on year. 

Previous research from Fuse showed that more than one in 10 (12 per cent) people are reliant on credit in order to pay their mortgage costs. 

Fuse CEO and co-founder Sho Sugihara says: “With homeowners under relentless pressure to meet ever-rising mortgage costs, the prospect of increased defaults appears inevitable.

“In order to protect mortgage holders from defaults, it’s vital that lenders introduce more effective approaches to assess affordability and utilise the full range of data insights at their disposal to ensure that they can step in at an earlier stage to offer support to homeowners who may be struggling.

“In this current climate, the much publicised 99% mortgage for first-time buyers being left out of the Chancellor’s recent Budget is a welcome move – many lenders had previously raised concerns that this scheme would raise the default rate further if introduced at a point where potential homeowners’ finances were already stretched paper thin.”