According to the UK Finance Household Review for the quarter, this reliance on mortgage brokers for help with external remortgages is set to continue as costs rise and affordability is constrained.
2022 a ‘normal year’ for house purchase trends
UK Finance said the impact of the mini Budget on the mortgage market would not be seen until the Q4 data is published, as it took place in the final days before the end of Q3 when nearly all the mortgages completed were arranged before the disruption.
In Q3, house purchase borrowing activity was flat year-on-year, falling just a little under levels seen in 2021 during the final months of the stamp duty holiday. It said the volume of mortgage applications in Q4 were expected to be similarly flat, but there would be a growth in remortgage activity and a softening of house purchases.
House purchase trends are currently in line with pre-Covid levels, which UK Finance said suggested this year was more normal.
It added: “Although Q4 has the potential to change full-year outturn in either direction, the applications data we have to date suggest that any divergence from the current path is unlikely to be significant in the final months of the year.”
The association said purchase demand would soften beyond 2022 and predicted that house price growth for the total year would be around 10 per cent which was higher than wage growth.
Longer term borrowing
UK Finance said there had not been a corresponding rise in income multiples for home buyers and house price growth over the last two years. Instead, the average income multiple for first-time buyers fell in Q3.
However, the average income of first-time buyers rose to just under £60,000, which is 17 per cent higher than in the same quarter last year. As wage growth does not match this increase, UK Finance said this suggested a shift to higher income households entering the market.
For lower income borrowers, stretching the mortgage term seems to be a way to combat affordability limitations. According to UK Finance, half of all first-time buyers and a quarter of home movers are borrowing at 30-year terms. This is a jump on a quarter of first-time buyers and a tenth of home movers doing the same in 2012.
UK Finance said: “While this is a relatively low-risk option for borrowers to increase their borrowing potential, it does, however, limit the ability of borrowers to save or invest in other areas – for example their pensions – for a longer period while they are still paying off their mortgage. In the long run then, this may have wider implications, both at the individual and wider societal level.
“It also limits the potential to use term extension as a forbearance tool, should the customer subsequently experience a period of financial difficulty.”
Remortgage reliance on brokers
UK Finance said refinance activity was “strong” during the quarter, and the trend of external remortgaging seen in Q2 swung to product transfers in Q3.
It said this could be down to lender retention and maturity schedules, but said it was more likely due to the tighter affordability assessments with remortgages.
After refinancing, a fifth of borrowers have less than 10 per cent of their income left over and UK Finance said this could make remortgage options limited.
There was a rise in the sales of remortgages through a broker, both with and without equity withdrawal, which UK Finance said reflected the difficulty of getting a good deal on the market as people refinancing tend to do so independently.
“We expect refinancing activity to remain strong in Q4 and into 2023, with 1.8 million customers set to reach the end of their fixed rate deals next year.
“The ongoing challenges around affordability in the face of rising interest rates and cost of living point towards a continuation of the current strength in internal product transfer markets and greater reliance on intermediaries to source external remortgage deals,” it added.
UK Finance said people who were due to refinance next year would find it more challenging. In its Q2 report, it said there would be an 11 per cent drop in the “wiggle room” of their budgets, and people would be left with a quarter of their net income. Now in its Q3 report, it has updated this to borrowers facing a 17 per cent reduction in disposable income and left with less than a fifth of their net income.
A third of borrowers could have less than 10 per cent of their income left over when they refinance, and this rises to almost half of borrowers when considering those on lower net incomes of less than £30,000.
No rise in arrears
UK Finance said despite rising costs and interest rates, there had been no headline impact on arrears. Instead, there was a decline compared to Q2, with 520 fewer arrears bringing the total to 80,180 in Q3.
It said the 80 per cent of borrowers on fixed rates were shielded from rate rises and although the 1.8 million households due to refinance next year would find it difficult, they were likely to absorb the costs thus preventing a significant uptick in arrears.
UK Finance said there was an increase in light arrears, which consists of people who are behind on their mortgage by 2.5 per cent of the overall balance or less.
Possessions rose as cases which were paused during the pandemic were processed. There were 1,120 possessions in Q3, up from 960 in Q2, however, UK Finance said this was still lower than normal.
The association said there were “very few” new arrears cases during Q3 and no new material possessions, adding that possessions for the next few quarters would likely be made up of historic cases.
It said if arrears increased as expected, forbearance and the ability to draw from equity would prevent this from feeding through to possessions until the end of 2024.
