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Nationwide has cast doubt over whether interest rates will start falling next year amid growing optimism the Bank of England could start lowering borrowing costs within months.
Chris Rhodes, Nationwide’s finance chief, said investors had been “overly positive” about recent economic news amid growing bets on rate cuts by the middle of next year.
Morgan Stanley this week predicted rates could start falling by May, while Goldman Sachs has said cuts could even come as soon as February. It follows signs of slowing wage growth, inflation and retail sales.
Mr Rhodes said: “I think the markets responded perhaps overly positive to recent news flow.”
Nationwide expects rates to begin falling in 2025.
More homeowners are falling behind on their mortgage payments as high rates hit finances, the lender said.
Mortgage arrears rose in the half-year to September 30 and the building society said: “Higher interest rates, continued inflationary pressures and the uncertain economic outlook remain key risks.”
Cases where homeowners are more than three months in arrears now represent 0.38pc of Nationwide’s total mortgage portfolio, up from 0.32pc in April.
The building society, which is one of Britain’s biggest mortgage lenders, has set aside £305m to cover potential losses on its more than £200bn home loan book.
Nationwide said the number of homeowners struggling to pay was still “historically low” and below its forecasts. However, the increase is a sign of how high interest rates are beginning to put pressure on families.
The lender expects further increases in mortgage arrears as inflation, higher interest rates and economic uncertainty continue to hit household finances.
Debbie Crosbie, chief executive, said: “Encouragingly, economic activity, while still weak by historical standards, has held up better than expected, and there are signs that cost of living pressures are starting to ease.
“However, conditions for households are likely to remain challenging in the near term, as the effect of previous interest rate increases feeds through and labour market conditions soften.”
New mortgage lending fell to £12.1bn during the six months to September, compared with £19.7bn in the previous year.
Ms Crosbie said: “The housing market has slowed and house prices have edged lower as a result of the higher interest rate environment.”
The increase in mortgage arrears comes despite solid profit growth on the back of rising interest rates. The member-owned lender increased year-on-year profits by 2pc to £989m.
The lender’s net interest margin – the difference between what it pays savers and charges borrowers – increased from 1.48pc to 1.66pc as rising interest rates allowed it to charge higher rates on its loans.
Rising interest rates have seen more customers transfer cash from current and instant savings accounts to fixed rate deals, Nationwide said.
Nationwide lowered mortgage rates below 5pc last week amid bets that interest rates will begin falling from the current level of 5.25pc next year.
Writing in the building society’s annual report, Ms Crosbie said: “Bank Rate is at or close to its peak, though there are significant risks in both directions driven by the ongoing uncertainty surrounding demand prospects and the supply capacity of the economy.”