According to the latest UK Finance Household Finance Review, 2022 experienced “exceptionally strong purchase activity and double-digit price growth” due to the Stamp Duty holiday and changes in housing demand due to the pandemic.
The total number of house loans in 2022 fell by around 15.6 per cent year on year to 813,006, with falls reported for first-time buyers, homemovers and buy-to-let landlords.
The largest annual decrease was in the homemover segment at with 23.6 per cent drop annually, followed by buy-to-let landlords with an 9.4 per cent fall year on year and then first-time buyers with an 8.6 per cent decrease annually.
The number of residential product transfers increased by two per cent annually to around 1.23m, whilst residential external remortgages fell by 39.6 per cent year on year to 192,400.
Buy-to-let external remortgages increased by around 28.7 per cent to 204,389 in 2022.
Mortgages in arrears came to 81,230, which is a fall of 5.2 per cent year-on-year and mortgage possession grew 74.2 per cent year-on-year to 3,920.
UK Finance said that this was because possession figures in 2021 were “artificially suppressed” due to the moratorium and closure of the courts. It added that the increase reflect the “gradual unwinding of the backlog of cases that would, under normal market conditions, have taken place through the previous two years of pandemic-interrupted market conditions”.
Softer purchase market expected this year
Going into more granular detail, UK Finance said that in the first nine months of the year house purchase activity was weaker compared to the same period in 2021.
It said that this fall was “in-line with expectations” but that in Q3, activity had recovered and approached 2021 levels.
However, by December the flow of mortgage applications had “dropped away sharply” compared to 2021.
UK Finance continued that Bank of England pointed to a “weak start” to 2023 for mortgage lending, and this was echoed by RICS data.
It predicted a “softer purchase market” as the cost of living crisis and interest rates over the course of last year were “baked into both household budgets and affordability calculations, and so bearing down on effective demand”.
The report saud: “Anecdotal evidence suggests that January may have seen something of a recovery in borrower interest for both house purchase and remortgage, although the extent to which any such recovery translates into borrowing activity remains to be seen.
“Notwithstanding this, a softer market is expected through the year, particularly compared with the buoyant levels of the past two years.”
Borrowers stretching affordability with longer terms
UK Finance said that, with house price growth outstripping wage growth, and affordability becoming more constrained, a greater proportion of borrowers were entering the market at higher income brackets.
Another trend noted in the report was first-time buyers and movers borrowing over a longer term to stretch their affordability.
The average term for a first-time buyer loan stands at 31 years, and more than half of first-time buyers borrow with a term over 30 years. This means that the average buyer entering the market could approach retirement age before they pay off their first mortgage.
The report noted that around a third of new loans for homemovers were for a term of over 30 years.
Internal product transfers will dominate
UK Finance said that refinancing peaked in October, which showed heightened borrower activity to refinance ahead of expected base rate increases. Levels then fell sharply as more deals had been pushed through.
Regarding pricing, the trade body said that new deal rates were typically higher than “record low mortgage rates” people had had previously but that the “market remains competitive” and pricing had started to trend downwards.
The organisation reiterated that inflation would limit “wiggle room” for borrowers and post-refinancing, lower income households would find themselves with “little left over”.
It also noted that there was an increase in internal refinancing, which showed “increased affordability constraints when sourcing a deal on the open market”.
Looking ahead, UK Finance said that refinancing activity was expected to strengthen further this year with 1.8 million fixed rate mortgages expected to mature this year. It said internal product transfers would account for a greater share of overall refinancing due to affordability.
Arrears and possessions to show modest uptick
UK Finance said that it “expected to start to see signs of increased payment stress in the latter part of the year”, although it takes a few months of missed payments to accrue to arrears of 2.5 per cent or more.
It added that arrears rose by around 1,000 cases, bringing the total to 81,000n which was in line with figures seen at the start of the year.
UK Finance said lender forbearance was a “key factor” in mitigating arrears and that the “lending industry has deployed and continually improved its range of options available to help customers struggling with their mortgages”.
Possession increased in the first three quarters of the year but dropped in Q4 due to a voluntary cessation during the festive period.
It said that possessions were lower than in any other year since 1980, when the stock of mortgages was half the size of current levels.
UK Finance said that it expected possessions to grow, with 7,300 forecast for the year.
It explained: “This low level of activity reflects the industry working through the mostly pre-pandemic backlog of the most serious arrears cases where all other options had been exhausted, with possession being the final option in the best interests of the customer.”
The firm added that arrears would hit around 110,000 by the end of 2023.
“Although there are downside risks – including an adverse labour market shock and further unexpected economic fallout from the ongoing war in Ukraine – our current outlook for arrears and possessions would see increases, but for both to peak well below the levels seen in the downturns of the 1990s and 2000s,” it said.
