Britain’s homeowners and small businesses are facing a fresh squeeze on credit as the fallout from the Iran crisis works its way through the financial system, with the Bank of England reporting the sharpest rise in mortgage defaults in more than a year.
The Bank’s latest Credit Conditions Survey, which gauges lenders’ appetite and the level of demand for new borrowing, showed that defaults on secured loans, chiefly residential mortgages, climbed to 6.2 per cent in the first three months of 2026. That is the highest reading since the final quarter of 2024, when defaults peaked at 7.8 per cent following a succession of interest rate rises by Threadneedle Street.
Unsecured lending told a bleaker story still. Defaults on credit cards, personal loans and overdrafts rose for a fourth consecutive quarter to 18.6 per cent, the highest level since the closing months of 2023, when the figure stood at 25.7 per cent. Taken together, the data suggests that household finances, which had begun to stabilise in the latter half of last year, are once again under serious strain.
According to the Bank’s report, demand for home loans and other forms of credit had remained buoyant in the run-up to the conflict, aided by a steady retreat in borrowing costs. That brief window of optimism has now slammed shut. Since hostilities escalated in the Middle East, lenders have rapidly repriced risk, pushing the average two-year fixed mortgage rate from around 4.8 per cent to beyond 5.5 per cent in a matter of weeks.
For a typical borrower with a £200,000 mortgage, that shift translates into roughly an extra £1,000 a year on repayments, a sum that few stretched households can comfortably absorb on top of stubborn food and energy bills.
Raj Abrol, chief executive of the risk platform Galytix, said the pain was radiating well beyond the front doors of British homeowners. “What started as a conflict in the Middle East is now showing up in borrowing costs right across the economy,” he said, warning that the turmoil had “spooked” the country’s big banks and triggered a surge in mortgage pricing.
Mr Abrol cautioned that defaults were likely to continue creeping upwards for some months yet, with inflation proving sticky and the cost of living crisis grinding on. As lenders retreat behind tighter underwriting standards, he argued, access to credit would become “a bigger challenge for consumers” and for the small firms that depend on them.
The deeper concern, he added, lies beneath the surface of the headline numbers. The cost of short-term corporate borrowing has more than doubled for lower-rated companies since late February, investment-grade credit spreads have widened by 15 basis points, and UK gilt yields briefly touched 5 per cent for the first time since 2008. When wholesale funding becomes dearer, the pain seldom stops with homeowners. It filters through to employers juggling payroll, to SMEs hunting for refinancing, and to consumers whose credit card rates and car finance deals quietly ratchet higher.
With close to a million fixed-rate mortgage deals due to expire by September and inflation drifting back towards 3.5 per cent, Mr Abrol warned that defaults risked moving from “a slow creep to something banks have to take seriously”.
Kenny MacAulay, chief executive of the accounting software platform Acting Office, struck a similar note of caution from the perspective of Britain’s small business community. He said that surging inflation and higher rates, against the backdrop of a stagnating economic outlook, would “heap fresh misery on homeowners and businesses alike” for as long as the Iran crisis rumbled on. In such an environment, he argued, building extra reserves and cash buffers was no longer optional but essential for any owner-manager hoping to keep the wolves from the door.
For SMEs already contending with weaker consumer demand, tighter trade credit and rising wage bills, the Bank’s survey is an unwelcome reminder that geopolitical shocks rarely stay confined to the headlines. They eventually land, with interest, on the balance sheet.
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Mortgage defaults hit two-year high as Iran crisis drives borrowing costs sharply higher
