Mortgage borrowing was very weak in Q4, according to the latest data from UK Finance’s Household Finance Review for Q4 2023.
Despite the welcome downward movement seen in swap rates in the early part of 2024, data revealed that new mortgage rates remained much higher than in recent years and, combined with cost-of-living pressures, continued to present significant a barrier to mortgage affordability.
Overall, UK Finance revealed that first-time buyer (FTB) numbers were down 22.4% during the period, with movers down by 26%.
In addition, just 251,000 home mover loans were advanced, the lowest number since 1974.
For households who bought a home last year, affordability pressures meant borrowers were choosing longer mortgage terms to lower the cost of monthly payments.
By the end of 2023, almost one in five FTBs were borrowing with a term of over 35 years, compared with fewer than one in ten the year before.
However, more positively, the number of applications for mortgage loans rose in Q4 2023. With inflation pressures easing, and expectations of lower borrowing costs to follow, the rise in applications signals that the market could grow in early 2024.
Affordability pressures also came to bear on mortgage refinancing activity.
External remortgaging – which theoretically had a sizeable market last year with 1.5 million customers’ fixed rate loans set to mature – fell by 18.5% compared with 2022.
However, with the widespread availability of internal Product Transfers (PTs) which do not require affordability tests, virtually all customers were able to refinance their loans.
As a result, refinancing activity shifted even further towards retention deals, and the PT market saw annual growth of 17.1%, the sole area of mortgage business growth last year.
The significant contraction in the mortgage market last year was widespread, and every region of the UK saw a double-digit percentage fall in lending volumes.
However, some regions were particularly hard hit – most notably London and the South East.
Whilst higher rates have tightened affordability everywhere, with the much higher prices in the South FTBs in 2023 needed almost one quarter of their gross income to cover initial mortgage payments.
However, in Scotland, where mortgage payments took up materially less – around one fifth of income – lending contracted by around half of that seen in the South East.
Mortgage arrears rose for the fifth consecutive quarter, in line with expectations. However, the level of arrears remains very low by historic standards.
Possessions numbers were broadly unchanged in Q4 and remain at very low levels.
With the backlog of historic cases largely cleared, UK Finance predicted a return to more normal timelines for those very few arrears cases where possession is, unfortunately, the only available option. Numbers are expected to remain low through this year and next.
Forward indicators suggest an uptick in lending in Q1, although from a very low base. Notwithstanding this, UK Finance said that it expects another challenging year for the mortgage market, dominated by affordability constraints.
Eric Leenders, managing director of personal finance at UK Finance, said, “2023 was a tough year for UK households and we expect to see continued challenges in 2024.
“Affordability remains a barrier to home ownership, but pressures should start to ease gradually through this year and next.
“Amidst ongoing cost challenges, it’s encouraging that customers don’t look to be running up higher levels of unsecured debt.
“But we know some households will be more affected than others – if you are struggling with personal loan, credit card or mortgage repayments, please reach out to your lender as soon as possible for help.”
Reaction
Darryl Dhoffer, adviser at The Mortgage Expert:
“When product transfers are the only bright spot, it’s a sign that things are broken. The aspirations of buying a home have been dashed for many by the harsh reality of today’s interest rates. For many people coming to the end of their mortgages, the product transfer is their only option.”
Hannah Bashford, director at Model Financial Solutions:
“It’s no surprise that product transfers have seen the highest growth. With more people being squeezed by the cost of living crisis and high-interest rates, borrowers have no option but to product transfer. However, the arrears data is interesting and shows how resilient UK borrowers are. I’m seeing lots of people using savings or having parental help to pay down their mortgage to help it become more affordable and reduce their burden.”
Riz Malik, founder & director at R3 Mortgages:
“This report should serve as a wake-up call to Rishi Sunak and Jeremy Hunt ahead of this week’s Budget. Most households are still struggling with the cost of living crisis and the property market is on its knees. This is their last chance to do something meaningful in the few months they have left in office.”
Gary Bush, financial adviser at MortgageShop.com:
“These final figures of activity in 2023 in the Household Finance Review just enhance the fact that the UK suffered greatly last year and that unless careful 2024 could well follow down that rabbit hole.
“On seeing the confirmation, which we knew from our customer activities, that people were being forced to draw down their savings to help make ends meet should be a warning to the government and the Bank of England that the cupboard is becoming bare.
“The fact that, through extreme caution, financial advisers are adopting mortgage product transfers rather than remortgaging to other lenders also enhances the worry that the market is in a bad way and lenders have become unreliable to predict.
“It’s clear to us that the inflationary data, to be released on 12th March, will be ultra important for the upcoming monetary meeting at the big bank. Much crossing of fingers for next week’s CPI announcement.”
Craig Fish, director at Lodestone Mortgages & Protection:
“There are no surprises here, and it’s a worrying sign when the only mortgage a client can get is a product transfer. This is hardly in line with Consumer Duty and should serve as a wake-up call to Jeremy Hunt, Rishi Sunak and the Monetary Policy Committee. Things need to change as people are struggling.”
Charles Breen, founder at Montgomery Financial:
“Two words: mortgage mayhem. The unforgiving tide of the cost of living crisis and mortgage rate increases has backed people into a corner. People who were living quite comfortably not so long ago are now living beyond their means. This is why we are seeing more product transfers and affordability rates decreasing.”
Bob Singh, founder at Chess Mortgages:
“The figures make gloomy reading but are nothing unexpected given the brutal financial terrain the economy navigated through in 2023. On the plus side, the uptick in activity indicates renewed confidence in the market as it continues to display resilience in the face of numerous challenges. A good Budget is now needed to set the course for the next few months in particular to stabilise swap rates, which have edged up of late. Can Jeremy Hunt pull it out of the bag for the Tories? We wait with bated breath.”
Rohit Kohli, director at The Mortgage Stop:
“There are no surprises here whilst, albeit the report does paint a more gloomy picture than I think people are feeling at the moment. We’re seeing more enquiries but it’s nowhere near levels pre mini-Budget. That disaster was always going to take years to recover from.
“I think alarm bells at the FCA should be ringing at the scale of product transfers in 2023 and if borrowers truly did get the right deal as this feels rather like the energy supplier standard variable rate debacle all over again. The chancellor has an opportunity to reignite the property market on Wednesday but the fact is that his hands are tied as a result of his shambolic predecessor’s actions.”
Michelle Lawson, director at Lawson Financial:
“The key takeaway here is that the product transfer market was the only performing area. How many people have stayed with their current lender for the ‘easy’ route rather than it being the ‘best’ route? How many took advice around this? How much more money could someone have saved by looking at their options? Too many people ‘think’ they can’t do anything and take advice from friends and social media sites.”
Louisa Sedgwick, commercial director for mortgages at Paragon Bank:
“Last year was subdued for buy-to-let lending overall, with the number of remortgage loans falling by nearly half as landlords coming to the end of fixed-rate products increasingly opted for pound-for-pound product transfers.
“With mortgage rates falling in the buy-to-let market since the end of last year, we expect to see remortgage opportunities opening up again for landlords, with more activity from those landlords seeking to raise capital for new purchases by releasing equity from existing properties or taking out new debt on unencumbered homes in their portfolio.
“Our recent survey showed that 37% of portfolio landlords, those with four or more properties, expect to expand their portfolios this year, with over half of those releasing equity from existing properties to support the purchase.”
