The hidden threat to the Lloyds share price in 2026

The Lloyds Banking Group (LSE:LLOY) share price seems to keep going higher. But there could be trouble just around the corner. 

A lot of UK mortgages that were fixed at low rates in 2021 are set to be refinanced. And while this could be a good thing for the bank, it could also be a big risk.

The set-up

According to UK Finance, 1.8m fixed rate mortgages are due to come to an end in 2026. That means a lot of borrowers will go from paying around 1% to just under 5%.

A significant number of these are thought to have originated five years ago – when interest rates were much lower. So that means they’re likely to be renewed at higher rates.

On the face of it, that’s a good thing for the likes of Lloyds. It means higher interest income and without a corresponding increase in costs, profits should get a boost as a result.

There is, however, a big catch. Unemployment has been on the rise recently and around 25% of adults in the UK are reported to have less than £1,000 in savings.

That could be a big problem. If those people lose their jobs, they’re going to run out of money within a few months at most and that’s likely to be followed by loan defaults.

I’m not saying there’s a problem in the housing market on the scale of The Big Short or anything like that. But I do think there’s a meaningful risk to be aware of right now.

Valuation multiples

As the UK’s largest lender, Lloyds has the largest absolute exposure. And the bank was active in 2020 and 2021 in encouraging borrowers to take on loans with rates fixed for five years.

I don’t think there’s an existential threat for the bank here. It has some of the strongest CET-1 buffers in the industry and a loan book with low loan-to-value assets offers some protection.

Nonetheless, the threat of loan defaults looks real to me. And I don’t think this is being reflected in the share price right now. 

The stock is trading at its highest price-to-book (P/B) multiple in five years. This suggests to me that investors are almost unreservedly optimistic about the future. 

In general, when expectations are high, it doesn’t take much going wrong to send a stock down sharply. And there’s a genuine risk that investors should be aware of.

Specifically, I think investors should be keeping a close eye on the unemployment data from the UK. If that continues to rise, the chance of mortgage defaults increases.

Being a good investor

Lloyds has been an outstanding stock over the last 12 months. But I think investors should be wary about expecting the same kind of gains going forward. 

Expectations are clearly high for the business. And with a number of mortgages set to be refinanced at higher rates, it’s not hard to see why. 

But I’ve laid out the risks clearly. They might not be existential, but the stock trading at unusually high valuation multiples makes it a bigger deal than it would be otherwise.

Given this, Lloyds isn’t on my list of shares to buy right now. I’ve got my sights set on what I think are some more attractive UK stocks.

The post The hidden threat to the Lloyds share price in 2026 appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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