Mortgage lending remained weak throughout Q3

Key points

• Mortgage lending remained weak in Q3, due to the higher cost of living and rising interest rates
• The combination of high house prices and increased mortgage rates means that households with lower incomes are now putting down deposits of up to twice their annual income to meet affordability requirements
• Households are continuing to draw on their savings to cover higher monthly bills, but there is no sign of increased reliance on overdrafts or credit cards to cover shortfalls
• Households are cutting back on spending in many areas, but this has not affected some sectors, particularly travel
• From a low base, mortgage arrears have risen as expected, while possessions fell slightly and remain at historically low levels 

Overview

We have seen cost of living pressures bear down on households for more than a year. The headline rate of inflation is falling, but the effects of high inflation and higher interest rates are becoming increasingly evident and will continue to be felt by households in the near term.

Among these pressures, households are showing caution, with muted spending growth and limited use of unsecured borrowing. Mortgage lending, typically households’ largest credit commitment, continues to be weak as customers face significant affordability challenges.  

While signs of unsecured debt stress are limited, mortgage arrears are rising. However, this is from a low base and around 99 per cent of borrowers are still able to meet their monthly repayments. For those who are struggling, lenders stand ready to help with a range of tailored support options to best meet customers’ circumstances - the key is to discuss these options early to find the right form of support.

Mortgage lending

Lending for house purchases fell throughout Q3, continuing the trend that started at the end of 2022, with customers facing significant affordability constraints from increases in the cost of living and higher interest rates. First-time buyer activity was down by almost one fifth and home movers by one quarter, compared to Q3 2022.

Number of mortgage loans, year-to-date comparison, market segments

Source: UK Finance

Mortgage lending was weak in almost every segment of the market but can be seen most acutely in the tighter end of affordability. In 2021, 57 per cent of first-time buyers had household incomes of less than £50,000. In 2023, this number fell to 46 per cent, and these customers are now having to put down deposits equal to twice their annual earnings, significantly more than in recent years. However, borrowers with higher incomes have not seen the same shift in increased deposit requirements.

FTB Deposit-income ratio, new borrowers

Source: UK Finance

Meanwhile, mortgage refinancing remains strong with affordability pressures and competitive retention deals driving nine out of ten customers in 2023 to take a Product Transfer with their existing lender.

Mortgage arrears and support

Mortgages in arrears rose as expected to 99,840 at the end of Q3, up nine per cent on Q2. Even with this increase, mortgages in arrears account for less than one per cent of the total number of outstanding mortgages, far below the rate seen in previous arrears cycles. Possessions remain extremely low by historic comparisons.

The Financial Conduct Authority-mandated stress tests, which ensure borrowers can cope with higher interest rates, are working effectively to keep recent borrowers out of payment difficulties. The vast majority of customers who are in arrears took out their loans before these mandatory stress tests were introduced.

Consumer spending and savings

Amidst weak consumer confidence and cost pressures, retail sales volumes have been falling for the past two years. Savings built up through the pandemic are likely to have supported some consumer spending, but personal loan borrowing, usually used for large purchases, fell away in Q3. Meanwhile, card spending data shows strength in the services sectors, especially in the travel sector.

As customers continued to draw on their savings to cover higher household costs, deposit levels fell by three per cent in Q3 when compared with the same period in 2022. While cost pressures continue, we are likely to see a further reduction in savings. However, savings levels are still significantly above trend. It is important to note, however, that savings are not held evenly across households, and many do not have this buffer.

Despite the reduction in savings levels, there is still no sign of households using more expensive unsecured borrowing to cover higher bills and costs. Credit card debt was around nine per cent below its pre-pandemic peak, and overdraft levels continue to trend down. However, Q3 did see a modest increase in the proportion of card debt that is interest-bearing which, if sustained for longer, would signal that more balances are not fully paid off each month.

Eric Leenders, Managing Director of Personal Finance at UK Finance, said, “While the cost of living continues to challenge households, many are managing to avoid using overdrafts and still have a savings cushion to draw on. Importantly, this won’t be the case for everyone, and we may see an increase in customers worried about their repayments. If anyone is struggling with personal loan, credit card or mortgage repayments, please reach out to your lender as soon as possible for help.

“Meanwhile, sustained house prices and rising mortgage rates have meant mortgage lending remained weak last quarter, and we expect this to continue in the fourth quarter of this year.”