Lloyds Banking Group is preparing itself for an increase in defaults amid rising mortgage rates. 

In its Q3 financial results, the UK’s biggest mortgage lender set aside £668m to protect itself against mortgage and loan defaults, due to a “deterioration in the economic outlook”.

The group’s base case scenario comprises an economic downturn with a rise in the unemployment rate, declining residential and commercial property prices, and continuing increases in the UK Bank Rate against a backdrop of elevated inflationary pressures.

After recent strong house price growth, Lloyds, which owns the country’s largest mortgage lender Halifax, also expected a fall of approximately 8% in house price growth in 2023 and a peak-to-trough fall of around 10%.

Lloyds group chief executive Charlie Nunn says: “Importantly, because of the strength of recent performance, this sees average house prices reverting to around the level of Q3 2021.”

“This means the vast majority of customers will still have experienced net price gains during the life of their mortgage product even after this adjustment,” Nunn adds. 

It also assumes that the base rate will peak at 4% in the fourth quarter of this year before falling in early 2024 as inflation is brought under control.

The lender suggests that inflation will peak at 10.7% in the final quarter of 2022 while unemployment is expected to increase by 5.5% in the first quarter of 2024.

Meanwhile, profit at Lloyds Banking Group fell by 26% to £1.5bn in the three months to September.

The business says its net interest income, the difference between interest earned on loans and paid out for savings, lifted 19% to £3.4bn in the period.  

But it added that “higher net income was more than offset by impairment charges as a result of the revised economic outlook” in the third quarter. 

Riverside Mortgages owner Lewis Shaw adds: “With the recent political and economic turmoil, it’s unsurprising that Lloyds Banking Group is preparing for problems caused by rocketing mortgage rates, at the same time as energy bills are increasing.   

“I hope this isn’t a sign of things to come but when a lender of this magnitude decides to plant their flag in the ground we should all sit up and take note. They know the game and I trust the way they play.   

“However, let’s put this in context, because of Halifax, Lloyds Banking Group are the biggest mortgage lender in the UK therefore they do need to protect themselves, more so than others.”  

UK Moneyman director Malcolm Davidson says: “There’s little doubt that cases of mortgage arrears will increase to some extent due to the recent spike in interest rates, which was caused by our previous Prime Minister’s unfunded, un-voted for fiscal experiment, which has now been thrown out like a disused lettuce.   

“Mortgage rates have started to drop this week and we can only hope that the upcoming rise in the Bank of England base rate was already factored into the mortgage increases we saw and the worst of this is now behind us.”