Mortgage lenders are anticipating a boost in the property market over the coming months, but emerging credit wobbles are already casting a shadow over this optimistic outlook. According to experts, loan default rates are climbing, with the full impact on households yet to materialise as consumers brace for price rises linked to the Iran war.
Rising Defaults Signal Underlying Pressure
The latest Credit Conditions Survey from the Bank of England, which measures demand for new borrowing, shows that defaults on loans from January to March 2026 have risen to 6.2 per cent. In the previous quarter, lenders reported hardly any defaults on mortgage debt, indicating that consumers were feeling the squeeze even before the Iran conflict, as the economy flatlined.
Karim Haji, Global and UK Head of Financial Services at accountancy firm KPMG, commented: "Rising default rates show that underlying pressure is building. The impact of the prolonged conflict on fuel prices is adding new pressure on household finances, and the full impact of higher costs and mortgage rates is still feeding through."
Secured and Unsecured Lending Trends
For secured lending defaults, which include mortgages, the Bank recorded 6.2 per cent in the first quarter of 2026, the highest since the last three months of 2024 when it was 7.8 per cent, a period marked by multiple interest rate hikes in the UK. This data marks a reversal from the fall in defaults reported in the last six months of 2025.
For unsecured lending defaults, such as credit cards, the Bank reported a fourth consecutive quarter of rising defaults, reaching 18.6 per cent in the first quarter of 2026. This was the highest figure since the last quarter of 2023, which stood at 25.7 per cent.
Mortgage Demand Expected to Increase
Despite these credit concerns, the mortgage and property market is still expected to see rising demand in the coming months, experts say. According to the Bank, demand for home loans and other debt remained high in the run-up to the Iran war, as borrowing costs fell.
Damien Burke, Head of Regulatory Practice at consultancy Broadstone, noted: "The latest Credit Conditions Survey suggests a cautiously improving outlook for the mortgage market at the start of the year, with lenders expecting demand to pick up in the coming months, particularly for house purchases and remortgaging. This reflects a degree of pent-up demand as home buyers awaited lower interest rates and a more certain fiscal landscape."
Impact of Middle East Conflict
However, the survey was conducted just as the Middle East conflict began. Brokers warn that the longer it continues, the worse the blow to borrowers and lenders. Raj Abrol, CEO of risk platform Galytix, explained: "What started as a conflict in the Middle East is now showing up in borrowing costs right across the economy. Mortgage rates have jumped from 4.8 per cent to over 5.5 per cent — that's an extra £1,000 a year on a typical £200,000 mortgage."
He added: "The ongoing turmoil of the Iran crisis has spooked many of the big banks, leading to a surge in mortgage rates and increased pressure on homeowners. Against this complex backdrop, a rise in defaults could well continue for many months as inflation persists and cost-of-living crisis worsens. The longer this uncertainty continues, lenders will continue to remain risk-averse, making access to credit a bigger challenge for consumers."
Broader Economic Implications
For companies, the cost of short-term borrowing has also jumped. When credit becomes more expensive, it hurts businesses' funding for payroll, hampers small and medium-sized businesses refinancing, and affects consumers whose credit cards and car loans quietly reset higher. With a million fixed-rate mortgage deals expiring by September and inflation heading towards 3.5 per cent, risk experts warn that defaults could move from a slow creep to a serious concern for banks.
Mr Burke further emphasised: "The fall-out from the Ukraine conflict on inflation and mortgage rates remains fresh in the minds of households, and even short-term disruption to supply chains can have a long-term impact on the cost of goods. This further amplifies the need for understanding consumers’ individual affordability when assessing for credit products."
Lenders had initially expected demand to keep growing as interest rates came down, but this may now have changed as borrowers become less optimistic or face refinancing mortgages at higher rates as fixed-rate deals conclude. Mr Haji highlighted: "Stable demand for unsecured lending shows households turning to credit to manage their increasing day-to-day spend. While some borrowers are still able to access credit, others are beginning to struggle with repayments, pointing to possible early stages of credit deterioration."
Bond yields, which link to mortgage prices, have eased this week following the announcement of a ceasefire, offering a glimmer of relief. Nonetheless, the overall picture remains complex, with credit wobbles emerging alongside expectations for property market growth.
