Mortgage lending hits lowest level since pandemic as affordability limits tighten

This latest review by UK Finance explores trends in household spending, saving and borrowing.

Households have faced more than a year of high inflation and rising interest rates and the impact of both is becoming more apparent in the trade body’s data.

Squeezed budgets and higher financing costs are bearing down more heavily on affordability for prospective house buyers. The same pressures are, as expected, gradually pushing up the number of customers falling behind on their mortgages.

UK Finance said the decline in lending activity is in line with its market forecast data as cost of living and interest rate increases tighten affordability limits, bearing down on effective demand for mortgage credit.

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.

For its analysis of arrears and repossessions, UK Finance said that several factors are 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.

On household savings, the analysis shows a year-on-year contraction in the level of savings for the first time in 15 years. 

The value of deposits in instant access accounts fell by 4% to £867bn compared with £905bn at the same point in 2022.

At the same time, the trade body reported that “significantly higher rates on longer-term savings products have meant a 15% increase in the value put away in notice accounts”.

Despite the concerning headwinds for borrowers, the expected dip in post-festive season consumer activity was offset by an uptick in spending on travel, including 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. 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.”