The 2nd quarter of this year’s Household Finance Review from UK Finance raises the curtain on mortgages. Due to affordability issues and a decline in activity for purchasing and selling homes, lending for home purchases and external remortgages remained sluggish in Q2 2023; Increasing borrowing over a longer period of time to stretch affordability appears to have peaked;
According to a UK Finance analysis, mortgage customers who internally refinanced at the conclusion of a fixed-rate agreement do so inside the stress-test tolerance limit that was applied to their initial application;
The Mortgage Charter has recently improved clients’ options while continuing to support any customers who are having financial difficulties.
Mortgage loans
At the beginning of the year, there was a substantial decline in mortgage lending for home purchases. This trend continued in Q2, with activity declining by about a third from the same time period in 2022. When compared to Q2 of the previous year, purchases by first-time buyers and homeowners were down by 28% and 30%, respectively.
This is largely a result of market instability as well as problems with affordability: housing prices as a percentage of income are close to historic highs, and when paired with increasing interest rates and rising living expenses, it has become more difficult for some borrowers to pass regulatory affordability standards.
In order to increase their affordability, consumers increased the amount of mortgages they took out in 2022, according to UK Finance. The leveling off of this pattern from Q1 persisted throughout Q2, nevertheless. Additionally, we noticed that average loan-to-value ratios and median income multiples began to decline, favoring borrowers with greater earnings and/or bigger down payments.
Internal product transfers became increasingly common as a result of affordability restrictions, which also had an impact on some external remortgaging activities. When compared to an average for 2022 as a whole, which was about 77 percent, the subsequent quarter saw 84 per cent of remortgaging deals be internal product transfers, along with that, the month of April was an all-time monthly high at 88 percent.
An investigation was done by UK Finance on customers who has been refinanced internally this year, comparing their new rate to the one that was used to determine their affordability when they first got their mortgage.
It demonstrates that although rates are considerably higher currently, they are still lower than they were before the stress test. Because of this, even though household finances are currently under a lot of pressure, clients usually still have some room for financial flexibility after refinancing.
It also demonstrates that the mortgage industry’s underwriting requirements, which have been codified in FCA regulations since 2014, are serving their intended purpose of ensuring that consumers’ budgets are robust against despite the substantial payment shocks many are currently experiencing.
Mortgage defaults and assistance
The number of mortgage arrears increased as anticipated, but the overall amount is still low by historical norms. Lenders continue to engage with their clients who are having financial difficulties to offer specialized forbearance that is best suited to each client’s needs.
According to Eric Leenders, “As increasing costs of living challenges have culminated in severe difficulty for a lot of people, we’ve additionally noticed that other consumers were mostly able to pay off their credit card balances while paying their monthly mortgage payments.”the managing director of Personal Financial Services at UK Finance. While some people have been using their retirement funds to help pay the bills, others have shifted their savings to banks with better rates to increase their income.
“In the first six months of this year, some 700,000 borrowers left their fixed-rate agreements and probably found themselves on substantially higher rates, which are nonetheless mostly within reach due to the “stress tests” carried out when the mortgage was first obtained. However, circumstances do change, so anyone having trouble making their mortgage payments should get in touch with their lender, who will have a variety of specially designed support options available to them.