Lloyds braces for loan losses as borrowers face £360 monthly mortgage jump

The banking group revealed its half-year profit increased by more than a fifth compared with last year.

Lloyds Banking Group has reported a surge in its half-year profit but set aside more than £660 million for expected loan losses (James Manning/PA) (PA Wire)

Lloyds Banking Group has reported a surge in its half-year profit but set aside more than £660 million as it gears up for expected loan losses amid rising mortgage rates.

Its mortgage customers could see monthly payments go up by £360 on average over the rest of the year.

The British banking group, which owns Lloyds Bank, Halifax and Bank of Scotland, reported a statutory pre-tax profit of £3.9 billion in the six months to the end of June.

It is a 23% leap from the £3.1 billion reported the same time last year, and was driven up by a boost in the bank’s income from higher borrowing costs.

Its net interest margin – which shows the difference between what a bank earns from loans and pays out for deposits – jumped to 3.18% over the period.

Although there are some very difficult decisions for those households or families to make, we know the vast majority can make ends meet

Charlie Nunn, Lloyds' chief executive

Major UK banks have come under pressure from MPs and the regulator to raise savings rates in line with the Bank of England’s base rate, which currently stands at 5%.

It comes as average five-year fixed-rate mortgages surpassed 6% earlier this month, according to data from Moneyfacts.

Lloyds, which is the UK’s biggest mortgage lender, said about 35% of mortgage customers have seen or will face an increase in their monthly repayments this year, when they fix to a new deal.

“For those customers coming off a fixed-price mortgage, in the first half of the year we’ve seen their monthly payments go up about £180 a month,” Charlie Nunn, Lloyds’ group chief executive said.

“Our expectation for the second half of the year is that will be more – the average customer will see an increase of about £360 a month. So quite a significant increase.”

But he insisted: “Although there are some very difficult decisions for those households or families to make, we know the vast majority can make ends meet.”

About 1% of Lloyds’ customers cannot currently make ends meet, Mr Nunn said.

In the latest quarter, Lloyds saw its profit shrink by 29% compared with the previous quarter, to £1.6 billion from £2.3 billion.

It set aside an impairment charge of £662 million over the half-year to cover expected losses from bad loans, with £419 million coming from the latest three months.

UK mortgage holders falling into arrears increased slightly in the latest period, the bank revealed, indicating that more borrowers have struggled with higher repayments as interest rates have risen.

Mr Nunn said: “We know that rising interest rates, cost-of-living pressures and an uncertain economic outlook are proving challenging for many people and businesses.”

However, he added that the bank “delivered a robust financial performance in the first half of the year” and that it is focused on supporting its customers.

Furthermore, the bank said it is no longer predicting the UK economy will enter a recession this year.

It also expects interest rates to peak at 5.5%, which is below the current expectations of financial markets.