"We expect near term mortgage market activity to remain relatively fragile."
The impact of more than a year of high inflation and rising interest rates is now "becoming more apparent", UK Finance's latest figures for Q1 show.
Squeezed budgets and higher financing costs are bearing down more heavily on affordability for prospective house buyers and the same pressures are gradually pushing up the number of customers falling behind on their mortgage.
Lending to both first-time buyers and home movers fell to the lowest level since Spring 2020, when the housing market was largely closed during the first Covid-19 lockdown.
Excluding that period of closure, first-time buyer numbers were the lowest since 2015 and home mover numbers were the lowest since 2009.
However, some borrowers are still stretching affordability with longer term mortgages. The proportion of first-time buyers taking out a mortgage with a term of over 35 years hit a record high in March at 19%. Meanwhile, 8% of home movers arranged mortgages with terms over 35 years.
UK Finance says that as yet, there is no sign that the customers coming to the end of their fixed rate deals are seeing their refinancing options limited by the tighter affordability constraints from these cost pressures when simply moving to a new deal. However, "these pressures may now be tempering the willingness and ability to borrow more against their home".
Mortgage arrears rose in the first quarter, although this is from a very low base and in line with UK Finance's expectations. However, it added that any increase in arrears, "even a modest one from a low base, is of concern".
Its new analysis shows that there is a range of factors driving arrears, depending on differing household circumstances, and this argues for lenders retaining a flexible, tailored approach to supporting borrowers through financial challenges.
Overall, around 80% of all arrears customers are on variable rates. Given almost all new lending is on fixed rates, the vast majority of arrears cases are much older mortgages.
Amongst early arrears cases (those under the 2.5% threshold for “headline arrears”) a somewhat greater proportion are on fixed rates. These customers are still on relatively low rates and payment difficulties are, therefore, more likely to be a consequence of the cost-of-living squeeze.
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. More recently, uncertainty around the inflation outlook has led to another bout of elevated volatility in swap markets, leading to some repricing by lenders. While this persists, we expect near term mortgage market activity to remain relatively fragile. Borrowers coming to the end of their fixed-rate deal are encouraged to seek advice from a whole-of-market broker."
