Weaker house purchase activity through last year was offset by price growth and strong refinancing, the latest UK Finance household finance review reveals.
The report found that gross lending increased by 1.9% compared to 2021.
UK Finance says last year’s growth was fuelled by exceptionally strong purchase activity and double-digit price growth because of the Stamp Duty holiday, as well as Covid-19-related societal changes in demand for housing.
Following the end of the Stamp Duty holiday, UK Finance shows that the volume of purchase transactions softened, as expected, particularly for home movers.
However, weaker transaction numbers were offset by still-healthy price growth and the expected strong market in refinancing, with an estimated 1.3m customers coming off fixed rates and looking to arrange a new mortgage deal.
Data found that refinancing activity saw a pronounced peak in October, which UK Finance suggests reflects borrower activity to refinance their mortgages in September ahead of expected rate rises.
Levels fell back sharply through the remainder of Q4, which is said to be in part a reflection of activity that was brought forward in October.
The UK Finance review found that increases in the Bank of England (BoE) bank rate have led to a shift upward in the price of all new deal rates and borrowers who took out their previous mortgage through an era of record low mortgage rates will typically face higher mortgage rates than before.
The market remains competitive, however, and UK Finance says it has seen pricing trend downwards since the post-fiscal event spike in October.
Looking at affordability, the UK Finance report finds that there has been a marked increase in the proportion of both first-time buyers (FTBs) and movers borrowing over a longer term, a means of stretching affordability which is not directly constrained by Financial Conduct Authority rules.
Whereas in previous generations borrowing over 25 years was the norm, the average term for a new FTB loan is now almost 31 years.
Data shows that over 50% of FTBs now borrow over a term longer than 30 years, which would put the average buyer entering the market now approaching their retirement age by the time they had paid off their first mortgage.
However, increasing mortgage terms are also seen for home movers, with over a third of new loans to movers being for a term of more than 30 years, which would see the average mover well into their 70s before the loan was paid off.
UK Finance says the rapid increase in this showed no signs of slowing through the final quarter of the year, supporting still-robust levels of borrowing even as cost-of-living and interest rate increases place additional constraints on mortgage affordability.
LiveMore managing director of capital markets and finance Simon Webb says: “The UK Finance figures show there has been a rise in the number of people are taking out longer-term mortgages to stretch affordability.”
“We are seeing people every day in their 60s, 70s and beyond needing to refinance their mortgage but many still don’t realise they can get a mortgage. More needs to be done to make people aware that finance is available regardless of age, and brokers are in the best position to do this.”
“As mortgage terms become longer and more people are in or approaching retirement, they will need good advice as to all their options.”
Meanwhile, UK Finance data shows that while most borrowers would still have a good proportion of spare income, post-refinancing, some are likely to find themselves with little left over.
As we have seen since the end of Q1, internal refinancing has seen an increasing share through 2022. A further increase in the use of brokers to arrange refinancing deals through the quarter also points to these greater challenges, UK Finance says.
The report suggests that refinancing activity will strengthen further through 2023, with some 1.8m fixed-rate mortgages set to reach the end of their deal period.
However, against the backdrop of tighter affordability, it is likely that internal product transfers will continue to take a greater share of overall refinancing, with external remortgage likely to show less pronounced activity levels.
Mortgage arrears
The report also looked at mortgage arrears. Through a year of bank rate rises and escalating cost-of-living pressures, the incidence of mortgage payment problems “defied expectations”, according to UK Finance, with total numbers falling in each of the first three quarters of 2022.
Contributing to this positive movement, almost 80% of mortgage customers are currently on fixed rates meaning the vast majority were shielded from the immediate impact of rate rises through the year while the remaining 20% that are on variable rates are, for the most part, much older mortgages with commensurately smaller balances.
In the third quarter of last year, although reportable arrears fell marginally, UK Finance says it did see a modest increase in early arrears.
These early cases fed through, as expected, into a similarly modest rise in headline arrears number in Q4.
However, the rise of just over 1,000 cases only brought the total to 81,000, which is almost exactly the number seen at the beginning of the year.
UK Finance suggests a key factor that has mitigated the incidence of mortgage arrears has been the range and extent of lender forbearance.
Phoebus Software chief revenue officer Adam Oldfield says: “Today’s figures from UK Finance highlight the trend that started at the end of last year and that set the tone for the first two months of 2023. “
“Nevertheless, we are starting to hear more positive news on the ground that the market is seeing some green shoots, which is what we have come to expect as we head into spring.”
“That being said, there are still worries regarding an increase in arrears in the coming months. There is an air of inevitability in this as interest rates continue to rise and borrowers come off very low fixed rate deals.”
“Lenders will need to be on the front foot to ensure that not only do they have the right systems in place but that they have the staff to ensure those exposed to this risk are given the help they need. We have been used to cheap money for such a long time, which was most certainly unsustainable, and for many, the current rates of interest are a shock to the system.”
“What everyone needs to understand now is that this is very likely now the ‘new normal’ and, as the Bank of England has already warned, rates will not be going down. Whether they’ve reached their height is the next question.”
