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House purchase and external remortgage activity weak in Q2 – UK Finance
Mortgage borrowing activity remained subdued in Q2 despite a recovery in consumer confidence, data from UK Finance showed.
The Household Finance Review for the period revealed that house purchase activity was down by almost a third compared to the same period last year.
It said the weakened activity was recorded across both home movers and first-time buyers and was due to affordability challenges.
It said with this set to continue, house purchase lending would “remain constrained over the near term”.
In Q2, applications for house purchase rebounded compared to Q1 but this was still down on last year and meant there would be a decline in completions in Q3.
Product transfers to suppress gross lending values
External remortgage activity was also weak as UK Finance said in Q1, transactions where additional money is withdrawn fell while there was an annual rise in pound-for-pound remortgages. The figures showed that at the time, there was a greater increase in pound-for-pound external remortgage activity than the rise in product transfers.
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The trade body concluded that affordability constraints were not yet influencing borrower behaviour.
However, in Q2 pound-for-pound refinancing activity fell while product transfers rose.
UK Finance said because product transfers depended on the maturity cycles of lenders, a surge in any month was not an indication of borrower trends. For example, product transfers made up 90 per cent of refinancing transactions in April.
The trade body said a shift towards product transfers had been noticed in the last 12 months, in line with higher rates and the rising cost of living.
It said many borrowers were still remortgaging externally but the affordability pressures were leading some to do a product transfer instead.
If this trend continues, UK Finance said this would bear down on gross lending values for the year.
The trade body noted that while the return of consumer confidence resulted in more card spending and personal loan borrowing, this did not translate to mortgage activity.
It said: “While confidence was on the up in Q2, household budgets are still under significant pressure.”
Affordability worries
While the shift towards product transfers has been partially influenced by the lack of affordability assessments, UK Finance found borrowers who refinanced this year had seen rate increases but these were “still comfortably below” the stress rate at which their affordability was initially tested.
It said on average, borrowers who were refinancing internally were paying over two per cent less than their initial stress rate.
Although borrowers will have less wiggle room with the finances, the trade body said they should still be within their budgets, which was a testament to regulatory lending requirements.
Following the news that more than half of first-time buyers and a third of home movers had taken mortgage terms of over 30 years, UK Finance said this started to “level off” in 2023.
It suggested that this method of stretching affordability had “reached its limit” as higher rates and inflation went beyond the capabilities of longer mortgage terms.
In Q2, this started with a fall in longer mortgage terms for first-time buyers then home movers which UK Finance said further supported this view.
The trade body also warned that longer mortgage terms could limit the other forms of forbearance available to borrowers.
At the same time, income multiples and higher loan to values (LTV) have fallen suggesting that it is mostly those on higher incomes or larger deposits remaining in the market.
Arrears and possessions
In Q2, headline arrears rose by 8.3 per cent or 6,920 cases to 90,680 mortgages with arrears of more than 2.5 per cent of the outstanding balance.
Although this is low by historical standards, this is the largest quarterly increase since 2009.
Heavier arrears cases, that are more than 10 per cent of the overall balance, fell as lenders worked through the backlog which had built up over the pandemic.
UK Finance said it expected there to be 98,500 arrears cases by the end of December 2023.
There was a small decline in possessions in Q2, from 1,260 cases in Q1 to 1,120 in Q2.
It said the fall was likely to be because of lenders and courts working through the backlogs.
UK Finance expects the rate of possessions to gradually increase over the year and include cases which reflect both the current cost of living crisis and the pandemic.