The strain on household budgets is hardening into cold, hard data, as new figures reveal loan defaults have risen to 6.2%, signalling a consumer under pressure even before the Iran conflict began tightening the screws.
According to the Bank of England’s latest Credit Conditions Survey, covering the first three months of 2026, defaults on secured lending, which includes mortgages, reached their highest point since the end of 2024. This marks a reversal from the falling default rates seen in the latter half of 2025. For unsecured credit, such as credit cards, defaults have risen for a fourth consecutive quarter to 18.6%, the highest since late 2023.
Pre-existing Strain Meets Geopolitical Shock
Analysts say these numbers capture a financial squeeze that was already building. “Rising default rates show that underlying pressure is building,” said Karim Haji, Global and UK Head of Financial Services at KPMG. He noted that stable demand for unsecured credit suggests households are turning to borrowing to manage day-to-day spending, even as others begin to struggle with repayments.
This underlying pressure now faces a powerful external shock. The conflict in the Middle East, particularly the blockage of the Strait of Hormuz, has severely disrupted global energy supplies. The research briefing details how oil prices have soared past $100 a barrel, a level not seen since mid-2022, while UK wholesale gas prices jumped by approximately 75% in a matter of weeks earlier in the year.
This energy price surge has fundamentally altered the economic landscape. The Bank of England now forecasts Consumer Price Index (CPI) inflation will run between 3% and 3.5% in the second and third quarters of 2026 due to higher energy costs, with KPMG UK forecasting a peak of 3.6% in September. The Organisation for Economic Co-operation and Development (OECD) has cut its 2026 UK GDP growth forecast from 1.2% to 0.7% as a result.
“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,” Mr Haji added. The Resolution Foundation and the House of Commons Library have noted the war is a significant headwind to living standards, expected to lead to higher UK inflation.
Mortgage Market Faces a Volatile Outlook
Against this complex backdrop, the mortgage market presents a picture of conflicting signals. The Bank’s survey, conducted just as the conflict began, found lenders expect demand for home loans to increase in the coming months, particularly for house purchases and remortgaging. Damien Burke, Head of Regulatory Practice at Broadstone, said this reflected “pent-up demand as home buyers awaited lower interest rates and a more certain fiscal landscape.”
Furthermore, the survey indicated lending criteria had loosened in the first quarter, with maximum loan-to-value ratios improving. Lenders anticipate a slight decrease in secured loan defaults in the next quarter and expect the availability of both secured and unsecured credit to increase.
However, the war has upended interest rate expectations. Previously anticipated cuts from the Bank of England now look unlikely, with markets pricing in the possibility of further hikes. This has directly translated to higher mortgage costs. The average two-year fixed-rate mortgage rose from 4.83% at the start of March to 5.90% by 8 April 2026, as lenders repriced products in response to rising swap rates.
Raj Abrol, CEO of risk platform Galytix, quantified the impact: “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 warned that the longer uncertainty continues, the more risk-averse lenders will become, making access to credit harder.
The situation is compounded by a looming wave of refinancing. Around 1.8 million fixed-rate mortgages are set to mature in 2026, up from 1.6 million in 2025. Homeowners moving off older, cheaper deals will face significantly higher repayments. While UK Finance expects remortgaging activity to grow, and some analysts like Nationwide predict modest house price growth, the persistent inflationary pressure casts a long shadow. Pantheon Macroeconomics, for instance, has already adjusted its 2026 house price growth forecast down from 3% to 1% due to Middle East tensions.
While a recent ceasefire announcement led to a momentary easing in bond yields, the underlying vulnerabilities remain. With inflation stubborn, growth forecasts downgraded, and a million fixed-rate deals expiring by September alone, the risk of defaults moving from a slow creep to a more serious concern for banks is palpable. As Mr Burke noted, the fallout from the Ukraine conflict on inflation remains fresh, and even short-term supply chain disruption can have a long-term impact on costs, underscoring the fragile state of household affordability.
