The share of households at risk of defaulting on their bank debt is unlikely to increase significantly this year, according to the latest analysis by the Bank of England.
Higher prices, higher interest rates and higher taxes are eating away at incomes but, in its latest Financial Stability Report, the Bank calculates that the proportion of households at high risk of struggling to repay either their mortgage debt or unsecured loans will remain broadly stable in 2022 and well below the level reached during the financial crisis in 2008.
40% of fixed rate mortgage deals expire this year and next and borrowers will in many cases be forced to pay higher interest rates.
But the Bank’s view is that the financial support on offer to households from the government will go a long way to protecting them from getting into deep trouble.
The Bank estimates that the proportion of households at high risk of falling behind on their mortgage repayments will rise to 1.8% by the end of this year. Just before the financial crisis it peaked at 2.8%.
This is striking because, if the Bank is right, then is not only is there unlikely to be a large increase in mortgage arrears over the next 12 months but house prices in the UK are very unlikely to fall significantly.
A few caveats: the Bank’s analysis is primarily concerned with assessing the resilience of the banking sector to this downturn.
While it concludes that most households will muddle through the next few months, those on the lowest incomes - who spend more than 90% of their disposable income on necessities and therefore tend not to have much debt - are likely to have a really distressing time.
The Bank’s horizon - 12 months - is also very short. Taxpayer support falls away next year, it’s not clear that inflation will have brought under control by then.
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If it hasn’t, then there are clearly risks the debt will become harder to service.
And, as the British Chambers of Commerce reminded us on Monday, businesses are not getting anything like the level of financial support from the government that households are.
As the Bank notes, the corporate sector is more exposed. Profits will be squeezed as consumers spend less on non-essential goods and services.
The Bank concedes that smaller businesses look particularly vulnerable. One third of small and medium sized enterprises have insufficient cash in their bank accounts to cover a week’s worth of turnover. Some will inevitably struggle.