UK Finance’s Household Finance Review for first quarter 2023 reveals that squeezed budgets and higher financing costs are bearing down more heavily on affordability for prospective house buyers.

The same pressures are gradually pushing up the number of customers falling behind on their mortgage.

Lending to both first-time buyers (FTB) 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, FTB numbers were the lowest since 2015 and home mover numbers were the lowest since 2009.

Nevertheless, the proportion of FTBs 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.

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

As UK Finance previously reported, mortgage arrears rose in the first quarter, although this is from a very low base and in line with expectations. However, it points out that any increase in arrears, even a modest one from a low base, is of concern and the industry is focused on helping customers navigate periods of increased financial stress.

Analysis from UK Finance highlights that 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.

UK Finance managing director of personal finance Eric Leenders comments:    “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”.

He adds: “While this persists, we expect near term mortgage market activity to remain relatively fragile.”