Mortgage Lending in Recovery

The UK mortgage industry has seen a mixed bag of recovery and challenges in the second quarter of 2024, according to the latest Household Finance Review from UK Finance. After a challenging period of rising interest rates, inflation, and declining consumer confidence, mortgage lending has returned to growth, although significant affordability concerns remain even as home prices improve.

Surge in Mortgage Lending

One of the key highlights of the report is the long-anticipated recovery in mortgage lending. After several quarters of contraction, Q2 saw an uptick in both first-time buyer (FTB) and home mover applications, with increases of 19% and 15% respectively compared to Q2 2023. This growth was largely driven by the strong mortgage applications witnessed at the end of 2023 and into early 2024, and the market could get even stronger if recent predictions of rate cuts down to 2.75% turn out to be true.

But despite growing optimism by mortgage intermediaries, the report notes that the surge in demand seen in late 2023 has since slowed, with application volumes tapering off toward the end of Q2. This suggests that while completions in Q3 may continue to rise, the overall market might not maintain this momentum throughout the year. Mortgage lending remains 16% lower than in 2022, a year regarded as the most recent “normal” period before the market downturn began.

Term Stretch as a Strategy for Affordability

With rising interest rates and inflationary pressures, many borrowers are stretching their mortgage terms to manage affordability. The report highlights that over one in five first-time buyers, one in ten home movers, and one in twenty remortgaging customers are now taking out mortgages with terms of 36 to 40 years, far above historical averages.

This term stretching is not new, but it has been amplified by current market conditions. Historically, borrowers used longer terms to meet affordability requirements, but the recent rise in interest rates has made this practice more widespread. Interestingly, UK Finance data reveals that borrowers opting for longer terms are facing higher payment-to-income ratios than those on shorter terms, reflecting the challenging affordability environment.

Rate Shock: Peaking and Stabilising

The so-called "rate shock," where homeowners coming off fixed-rate deals face significantly higher interest rates, appears to have peaked at the end of 2023. According to UK Finance's data, while refinancing rates were typically over 3% higher than the previous fixed rates, these levels were still more than 1% below the stress test rates lenders used when issuing the original loans. This means that despite the higher refinancing costs, many homeowners have been able to weather the rate increases without falling into financial difficulty.

The report also points out that mortgage refinancing was relatively subdued in Q2, with 408,000 refinances taking place, a 5% decline from Q1. Internal product transfers accounted for 82% of this refinancing activity, underscoring the market’s caution as affordability remains constrained.

Mortgage Arrears Stabilise, But Caution Remains

For the first time in six quarters, the number of households in mortgage arrears did not increase, holding steady at around 109,700 mortgages in arrears by the end of Q2. This stabilisation is welcome news after consistent increases since the end of 2022. However, the report warns that continued cost-of-living pressures and rising unemployment could reignite issues in the second half of the year.

Possessions have also risen, with 1,620 mortgage possessions recorded in Q2, a 34% increase from the same quarter in 2023. However, UK Finance stresses that this increase largely reflects the industry and courts returning to normal after the pandemic, and the overall rate of possessions remains well below historical norms.

Outlook for the Remainder of 2024

Looking ahead, the report offers a cautious outlook for the rest of 2024. While interest rates are expected to continue to fall in the second half of the year, affordability challenges will persist. The household sector, buoyed by wage growth and a more stable inflationary environment, will continue to face pressure from higher interest rates than were seen before 2022.

Despite the recovery in lending, UK Finance maintains its forecast for subdued overall activity in the mortgage market, driven by a combination of high house prices, ongoing affordability constraints, and a weak economic backdrop.

The industry will also be keeping a close eye on the upcoming government budget, as decisions on taxation and spending could impact consumer confidence and mortgage demand.

The Household Finance Review for Q2 2024 paints a picture of a mortgage market that is beginning to recover from a prolonged slump but is still facing significant headwinds. While the growth in lending is a positive sign, affordability remains a key concern for both first-time buyers and home movers.

As interest rates begin to ease, the hope is that more potential borrowers will be able to enter the market, but for now, cautious optimism prevails. For mortgage lenders, the focus will remain on managing affordability, adapting to changing consumer needs, and navigating an uncertain economic environment as 2024 progresses.