Mortgage lending and external refinancing in the UK continued to show weakness in Q2 2023, according to the latest Household Finance Review by UK Finance.
The report highlights the ongoing challenges of affordability and reduced activity in house buying and selling that have weighed on the UK’s housing market in recent times.
Borrowing for house purchases saw a significant decline at the beginning of the year, dropping nearly a third in Q2 compared to the same period in 2022.
Specifically, first-time buyer purchases and homemover purchases decreased by 28% and 30% respectively. These declines are primarily attributed to “uncertainty in the market as well as affordability issues: house prices relative to income are near historic highs,” compounded by rising living costs and higher interest rates, which make it increasingly difficult for borrowers to meet regulatory affordability tests.
Throughout 2022, there was a surge in mortgage customers opting for longer-term borrowing to stretch affordability. However, this trend seems to have plateaued. “We also saw typical income multiples and average loan-to-values start to fall back,” the report notes, indicating a shift in favor of those with higher incomes or larger initial deposits.
Affordability issues have not only dampened house purchases but have also influenced external remortgaging activities. “The second quarter saw 84% of remortgaging deals being internal product transfers,” the report states. In April alone, internal transfers reached a record monthly high of 88%, compared to an average of around 77% throughout 2022.
According to UK Finance’s analysis, while borrowers who have refinanced internally are paying higher rates, these rates remain “below the prior stress test rate.” Eric Leenders, managing director of personal finance at UK Finance, said: “Around 700,000 borrowers have come off their fixed rate deal in the first half of this year and likely found themselves on a much higher rate, which continue to be largely affordable because of the ‘stress tests’ applied when the mortgage was originally taken out.”
In terms of mortgage arrears and support, arrears have risen but remain low by historical standards. Leenders emphasized that those facing payment difficulties should seek assistance. “But circumstances can change, so if anyone is struggling with their mortgage payments, they should reach out to their lender who will have a range of tailored support available to help,” he advised.
Consumer spending has seen some upward movement, with the rate of growth in outstanding credit card balances appearing to level off. Personal loans increased slightly from £4.6bn the previous quarter to £4.7bn.
Households have continued to use their savings, albeit more are opting for notice accounts, which offer higher returns. Leenders observed: “Some have been dipping into their savings to help to pay the bills, whereas some of those with savings have moved their money to accounts with higher rates to maximise their income.”
