Both savings and mortgage lending taking a significant hit due to the enduring climate of high inflation and rising interest rates in Q1 2023, according to UK Finance.
UK Finance’s latest Household Finance Review for Q1 2023 found that families and individuals across the country are feeling the squeeze as increased costs of living and higher financial charges continue to restrict affordability for aspiring homeowners.
And the strain is becoming evident, with a rising number of customers falling behind on their mortgages.
However, the spending patterns and use of unsecured credit for many seemed to follow typical seasonal trends at the beginning of 2023, despite the economic hardship.
Mortgage lending to first-time buyers (FTB) and home movers plunged to its lowest point since Spring 2020, a period during which the housing market came to a near standstill due to the first Covid-19 lockdown.
Apart from this extraordinary episode, FTB numbers reached their lowest since 2015, and home mover numbers hit a nadir last seen in 2009.
Nevertheless, a record high of 19% of FTBs in March opted for mortgages with terms exceeding 35 years. Among home movers, 8% arranged mortgages with terms over this period.
The fall in activity aligns with market forecast data, suggesting that increasing living costs and interest rates are pushing against the demand for mortgage credit.
While the current economic pressures haven’t seemed to limit the refinancing options of customers nearing the end of their fixed rate deals, these factors could now be discouraging the willingness and ability to borrow more against their homes.
Unsurprisingly, mortgage arrears saw a rise in the first quarter, a situation that, although anticipated, is nonetheless alarming. The industry is honing its focus on assisting customers through these challenging times, with flexible and tailored approaches being advocated.
The first quarter of 2023 also witnessed a year-on-year contraction in household savings, an event not seen in at least 15 years. The value of deposits in instant access accounts dropped by 4% compared with the same period in 2022, falling to £867bn from £905bn. Predictions suggest further drops in savings levels until the present cost pressures alleviate.
Despite these economic headwinds, many consumers managed to keep to their regular spending habits. The start of 2023 followed the usual pattern of a dip in consumer spending after the festive period, with a contraction in supermarket expenses and other regular expenditures. This was counterbalanced by a significant surge in spending on travel, particularly with airlines.
Eric Leenders, managing director of personal finance at UK Finance, said: “Cost of living pressures and higher interest rates weighed on households in Q1.
“We saw the first year-on-year drop in savings levels in 15 years as people dipped into their savings pots to pay their bills and support usual spending.
“Meanwhile, mortgage lending dropped significantly at the start of the year, although some borrowers are still stretching affordability with longer-term mortgages.
“As always, it’s crucial that customers worried about their finances speak to their lender as soon as possible, so that they can discuss the options available for help.”
