According to UK Finance’s latest household finance review, homemover numbers in Q1 2022 were 42 per cent lower than the same period last year and first-time buyer numbers were 12 per cent down.
This was attributed to “unprecedented volumes” at this time last year due to the stamp duty holiday, therefore the drop-off was expected after its phasing out.
The report said the number of mortgage applications submitted in Q1, most of which are expected to complete in Q2, were two per cent greater than the same period last year. It said this growth was due to strong remortgage activity.
It continued that it expected “relatively robust” house purchase activity in Q2 but it would show a year-on-year decline given the strong activity last year.
UK Finance said first-time buyer activity was trending above pre-pandemic levels but the outlook for 2022 was unclear.
It explained that as first-time buyers tended to be younger and lower on the income scale, there could be “greater downward pressure” on this group from cost of living crisis.
The report said tax increases and rising inflation had not yet fed through into mortgage completions but “material changes” such as energy bills and tax changes, could start to feed through in Q2.
Disposable income will contract for mortgage households
UK Finance said the average mortgaged household would experience a three per cent fall in the amount of disposable income left after mortgage, credit commitments and living costs.
It said this would have a “relatively modest impact on effective demand” and the average affordability assessment would only experience a “small downwards impact”.
UK Finance continued that the average borrower had over half of their net income to spare after subtracting all these items.
It added that the cost of living crisis would be felt most acutely in the lower-income brackets as people in this bracket have around half the spare income compared to those in higher brackets.
However, it said most borrowers across all income brackets would have a “good proportion of income” and would still qualify for mortgage credit as they did last year but those at the margins would struggle.
Product transfers most popular remortgage option
The report said the proportion of total remortgages where extra money was taken out has fallen to 50 per cent, which is the typical level since 2012.
It said that over the past two years, equity withdrawal in total remortgage activity had risen.
UK Finance added that internal product transfers dominated activity, with eight in every 10 customers taking a product transfer with their current lender.
It said the split between product transfers and external remortgaging was “erratic” as it was influenced by fixed rate maturity schedules and retention strategies.
However, UK Finance said product transfers had started falling to pre-pandemic levels, but they were still the preferred option.
Equity withdrawal for home improvements ‘significantly elevated’
The report said that equity withdrawal was returning to pre-2020 levels and that the amounts taken out for home improvements were “significantly elevated”. It explained that this reflected inflation and growing cost of labour and materials.
“These increased costs are likely to keep the pound values for remortgage activity higher, particularly whilst the current Covid-triggered wave of improving and adapting living spaces persists,” it said.
It added that it had not seen a “material increase” in money withdrawn to consolidate more expensive debt into a mortgage, although average amounts have been slowly trending upwards, which reflected inflation.
UK Finance said this showed that cost of living increases had yet to feed through into the build-up of unsecured debt.
Arrears continue to fall
The report continued that arrears had fallen in Q1 this year to 81,480, which compares to 85,610 seen at Q4 last year.
It said as arrears took time to accrue, it did not expect rate increases to feed through into arrears until the end of Q2, and noted that mortgage pricing still remained low by historic comparisons.
It added that heavy arrears fell by 650 cases to 31,070 and this was the first quarterly decrease since Q4 2019.
The trade body said this had been rising since the start of 2020, partially due to the possessions moratorium as cases that would have gone through this process remained in arrears .
It noted that this fall could be an “early indication” that the backlog of possession cases had started to clear, but further data was needed to confirm this.
Possessions came to 980 in Q1 this year, which UK Finance said was well below typical levels.
It added that it expected possessions to rise to 7,700 as the backlog was cleared but this was still low compared to historic standards.
UK Finance said that as it took time for heavy arrears to build up and had longer processing times in the courts, it would not expect material umbers of new possession cases until the end of 2023 at the earliest.
Brokers say effect of cost of living still feeding through
John Phillips, national operations director at Just Mortgages, said the report confirmed a “stable start to the year” as application activity was similar to pre-Covid levels and feedback from brokers suggested that remortgaging remained strong.
He said: “However, what these figures don’t yet show is the recent shake-up in household budgets with interest rates, fuel, energy, and food costs all rising steeply and eating away at take home pay especially for lower-income families and typically first-time buyers.
“The chancellor has warned that interest rates are expected to rise to 2.5 per cent by the end of the year and with the cost of living rising rapidly, complying with affordability conditions will become increasingly difficult. Our brokers tell us that competition for houses remains very high and borrowers’ key concern is securing a mortgage offer and having the ability to proceed when they find the house they want.”
He said that in the latter half of the year, mortgage demand should remain strong as borrowers aim to secure a competitive purchase or remortgage deal before further rate rises. He said speed of offer could become more important than rates for some borrowers due to housing stock issues.
Emma Hollingworth, distribution director at MPowered Mortgages, said it was no surprise that house purchase borrowing dropped in Q1 given the high levels of activity seen in 2021.
She said: “While rising mortgage rates and the rising cost of living have had some impact on the appetite of those looking to buy or move home this year, consumer demand for housing remains strong. Unfortunately, the window of availability on mortgage deals is now shorter than it has ever been before, averaging just 21 days.”
She added that it was an “increasingly challenging market for homebuyers” and it was important that as an industry it supported customers. She noted that research done by the firm showed customers valued better service over rate, and more could done to improve the mortgage process.