Lloyds warns of jump in loan arrears as interest rates soar

LLOYDS Bank has warned of a rise in customers falling behind on loan payments as mortgage rates soar.

The FTSE 100 lender said it saw “modest” increases in defaults and arrears between January and March.

Levels remained at or below those experienced before the pandemic. However, the small rise represents one of the first warnings from a major British lender about stress in the wider economy seeping into the mortgage market.

Bank bosses have previously said that despite the tougher economic conditions, they have yet to see any significant increase in customers defaulting on their loans.

William Chalmers, Lloyds’s finance chief, said new arrears mostly relate to mortgages written between 2006 and 2008, at a time when borrowers could over-stretch themselves and credit rules were less stringent.

Many of these loans were also on variable rates, making borrowers more vulnerable to the Bank of England’s base interest rate increases.

Mr Chalmers said: “Some of those customers are experiencing a tough time. But it’s very modest. It doesn’t cause us any alarm at all.”

Threadneedle Street has raised its base from 0.25pc at the beginning of last year to 4.25pc, with traders now expecting it to hit 5pc by September.

Charlie Nunn, the chief executive of Lloyds, added: “The macroeconomic outlook remains uncertain. We know that this is challenging for many people.”

Lloyds set aside nearly £250m for bad loan provisions during the first quarter of the year, up from £177m during the same period last year.

The increase in arrears came despite Lloyds posting strong profits on the back of rising interest rates. The lender reported pre-tax profits of £2.3bn for the three months to the end of March, up from £1.5bn a year earlier.

However, Mr Chalmers said that Lloyds was facing increased pressure from rivals in both the mortgage and savings markets on prices.

He said: “We’ve seen mortgage margins as low as they’ve been for a while.”

Lloyds’ shares fell 3.6pc to close at 46p yesterday, valuing the bank at £30.2bn.