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Borrowers’ disposable income to become more constrained after refinancing – UK Finance

  • 08/09/2022
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Borrowers’ disposable income to become more constrained after refinancing – UK Finance
Disposable income will become increasingly constrained which will consequently impact those refinancing this and next year.

According to UK Finance’s household finance review for Q2, 1.3 million existing borrowers are set come to the end of their fixed rates this year and refinance.

It added that with the Bank of England’s peak inflation forecasts rising to over 13 per cent, along with base rate increases, those refinancing this year would see a fall of a little under 11 per cent of the wiggle room in their budgets.

This means that the average customer would have nearly one quarter of their net income left over after refinancing.

The report noted that the average borrower would still be able to refinance on the open market, however there would be a “material – but significantly reduced – degree of free income left over”.

However, it said that there was a “significant spread of circumstances” especially amongst those on lower income brackets as they would have “materially less free income”.

“At the lower end, these borrowers could face a smaller range of refinancing options, as they may fall short of some lenders’ FCA-mandated income-expenditure affordability tests. However, the widespread availability of internal product transfers, which are not subject to the same affordability tests, mean that most borrowers will still be able to refinance onto a new deal with their existing lender,” it explained.


Rate rises

The analysis by UK Finance also suggested that if mortgage product rates rose by 100 basis points, homeowners refinancing would see an average fall of some four per cent in wiggle room compared to when they took out their last mortgage.

The average borrower would consequently have a fifth of take-home pay as free disposable income, although those on lower incomes are likely to feel “combined cost pressure much more acutely”.

Those on lower incomes would be left with ten per cent or less of take-home pay, compared to over a third for those in higher income brackets.

UK Finance added that a little under three in ten borrowers with fixed rates maturing this year would be left with ten per cent or less disposable income.

“This suggests that a significant proportion of borrowers would find their refinancing options constrained on the open market. The same affordability pressures are likely to bear down on effective demand for new house purchase mortgages as we move through this year and beyond, whilst inflation outpaces wage growth,” it noted.


Mortgage refinancing predicted to rebound after slight fall

The report said that refinancing was weaker in Q2 than in Q1 but is expected to grow in the second half of the year.

The fall was due to a decline in product transfer business, with external remortgages up from the same time last year.

The report said that this trend was due to product transfer volumes being “lumpy” as lenders reached out to customers when they came to the end of their deals. It is therefore dependent on new business patterns over the past few years.

It also posited that there was a shift towards external refinancing as borrowers sought to secure the best deal as rates rose.

UK Finance said it expected refinance activity to grow in both segments, with a further 1.8 million customers set to reach the end of the fixed rate deals next year.

The trade body also noted that over one million homeowner mortgages were on lender’s Standard Variable Rate (SVR) and could move without early redemption charges, and more would be inclined to switch as base rate increases lead to higher prices.


Arrears expected to grow

The total number of customers in mortgage arrears continued to fall in Q2, marking the fifth successive quarter of decline. This is despite rising cost of living and increases in the base rate.

UK Finance said that the number of borrowers in heavier arrears, which is 10 per cent or more of the mortgage balance, had fallen for the second successive quarter.

It noted that this showed that the backlog of cases due to possession moratorium was “starting to clear”.

At the other end of the arrears spectrum, early arrears grew by 170 cases to 25,160 cases. Whilst a small rise, it compares to significant falls in previous quarters starting from Q3 2020.

UK Finance said that it expected “further, and larger, increases in mortgage arrears” as the combined pressure of rate rises and inflation would limit free disposable income and many low income household could face more difficulties.

The report added that possession activity was flat at around 1,000 properties, which was due to industry and courts continuing to work through the backlog.

It said that possession levels were “significantly below typical levels”.

UK Finance said it expected possessions to rise through the year as the backlog unwound, but it is unclear whether the rate of increase would see number reach 7,700 forecast at the end of 2021.

The report said that it did not expect a great increase in possession activity due to cost of living and interest rate pressures.

“Although the wider economic outlook has weakened significantly unemployment, which has historically been the key driver of arrears and, ultimately, possessions, is forecast to rise only relatively modestly. As such we expect customers facing difficulty to have more options to mitigate their situations,” the report noted.

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