Its Household Finance Review said lending for house purchase fell sharply in Q3 while lending to first-time buyers and home movers had declined annually in every month since December 2022.
UK Finance said the “significant contraction” in mortgage lending this year had been widespread and hardly any areas of new lending reported growth.
High LTV borrowing down
It said first-time buyers had surprisingly not been “hit disproportionately hard” and activity was 22 per cent down on the same period last year. This was less of a drop compared to the 26 per cent decline in home mover numbers.
UK Finance added: “Even amongst younger first-time buyers, who might be expected to be more sensitive to affordability-related pressures, numbers have fallen by slightly less than the wider house purchase market.”
Its data showed that activity among high loan to value (LTV) borrowers, at 90 per cent and above, fell by around 40 per cent. Activity among people borrowing at more than 4.5 times their income fell by 60 per cent annually, while remortgage with equity release activity dropped by around a fifth.
For high LTV borrowers and people exceeding typical income multiples, UK Finance said there were affordability challenges as the higher rate environment meant people had possibly reached a limit when extending mortgage terms to reduce payments.
Compared to last year, there were increases in activity for simple remortgages and product transfers. These were the only parts of the market recorded in the data to show growth.
Low income borrowers restricted by higher rates
The data showed that the borrowing capacity of lower income households had been restricted due to higher rates, particularly among people who would have been seen as having a decent income previously.
UK Finance said that as recently as 2021, 57 per cent of first-time buyers had an income of less than £50,000 but this had fallen to 46 per cent in 2023.
It said people with lower incomes would need a larger deposit and those earning less than £50,000 were now putting down deposits of nearly double their gross income.
“This is a particularly difficult hurdle given those on lower incomes typically have less free disposable income to put away each month, and this pressure on disposable income has, as we know, has been accentuated for lower income households throughout the cost-of-living crisis,” the report continued.
UK Finance said the softening of house prices was still modest and the rises in real income growth would ease affordability, but this would take time.
Looking at application data, UK Finance said there were signs that Q4 would see a “further, deeper contraction in mortgage completions”.
Internal refinancing stays strong
UK Finance said remortgages with additional borrowing activity had fallen further than house purchases in the year-to-date.
So far, 1.3m refinances have been pound-for-pound out of the 1.5m fixed rate deals set to expire this year. Of these, nine out of 10 were internal product transfers.
It said people looking to remortgage away from their lender faced the same affordability challenged as prospective buyers, which was driving the move towards product transfers.
It said borrowers who are refinancing this year, particularly those who fixed in 2021 when rates were at record lows, were experiencing the “largest rate shock”.
However, UK Finance said rates were still lower than the rate these borrowers would have been stress tested at. There will still be a notable rate jump for refinancers next year, but it will be smaller.
UK Finance said this suggested there would still be a preference for product transfers going forward.
Arrears and possessions
In Q3, there were 99,480 mortgages in arrears of more than 2.5 per cent of their overall balance. This was a nine per cent increase since Q2.
UK Finance said this rise was expected as data pointed towards this in the previous quarter. It said the arrears in this bracket typically resolved themselves in the short-term.
Arrears had increased across all bands, from the lightest to heaviest cases, but larger rises were seen in the lower bands. It said early arrears, which were less than 2.5 per cent of the balance, showed a larger rise in Q3 indicating another increase in Q4.
However, UK Finance said arrears were still “very low by historic comparisons”.
Overall, less than one per cent of all mortgages are in arrears, which is less than half the proportion seen at the height of the global financial crisis and less than a quarter than in the early 1990s.
Mortgage possessions stayed relatively flat at 1,100 cases in Q3 compared to 1,120 in Q1.
UK Finance said although arrears had risen, possession activity was “incredibly low by historical comparisons” and below the already low activity just before the pandemic.
It said most possessions still related to the backlog which built up during the pandemic.
Going into 2024, UK Finance expects possession activity to remain muted and any increase to be low. It said borrowers who are unable to get back on track following help from a lender could result in possession and emerge in late 2024.