Mortgage lending increases 19%

UK Finance has released its latest Household Finance Review for Q2 2024 which highlighted that mortgage borrowing in Quarter 2 (Q2) had increased by 19% for first-time buyers (FTBs) and 15%have for movers when compared with the same period last year.

The rise was driven by the spike in mortgage applications we saw late last year and early this year. However, lending is still around 16 per cent lower than in 2022 and we’ve seen mortgage applications tail off as house prices recovered. This suggests that growth may not continue through to the end of the year.

The trend of borrowing at longer terms remains higher than in the past. More than one in five FTBs took out loans with terms of 36 to 40 years during Q2. However, our analysis of monthly payments versus incomes suggests that borrowers are increasingly using term stretch to get the mortgage size they need, rather than to manage their monthly payments.

Despite this trend, just three per cent of homeowner mortgages on a ‘capital and interest’ basis are currently held by borrowers who are over 65. When a borrower’s mortgage term does stretch into retirement, their lender will carry out an affordability assessment to check that the borrower will be able to continue paying their mortgage once they do retire.

Affordability challenges continue to affect refinancing, with external refinancing loans in Q2 falling 12 per cent compared with a year earlier to 408,000. Internal product transfers (PTs), where an affordability assessment is not needed, accounted for 82 per cent of Q2 refinancing.

The data also showed the increases in payments for borrowers reaching the end of their fixed rate deals appear to have peaked at the end of 2023. And while customers’ new rates were typically three percentage points higher, they were still paying one percentage point below what their lender had calculated they could afford.

UK Finance data showed a mixed picture of consumer spending activity in Q2, with some continued weakness in spending on bigger ticket items, except for travel.

A combination of this cautious spending and small increases in incomes following falling inflation saw savings levels return to annual growth, rising one per cent year-on-year. Meanwhile, overdraft debt continued to trend down and remains well below pre-pandemic levels.

Outstanding credit card debt continued to grow, but the proportion that’s interest bearing remained just under 50 per cent, a record low since at least 1995.

Mortage.arrears cases stabilised in Q2, falling very slightly from 109,900 at the end of Q1 to 109,700. Early arrears cases also fell, suggesting total arrears may fall again in Q3.

There were 1,620 mortgage repossessions in Q2, up 34 per cent from the 1,210 in Q2 2023 but still substantially below pre-pandemic levels. The rise is due to the courts continuing to work through their backlog of historic long-term cases from before the pandemic.

Eric Leenders, Managing Director of Personal Finance at UK Finance, said “Whilst it’s encouraging that cost-of-living pressures easing meant some households were in a slightly better place financially in Q2 this year, it’s too early to say that the worst of the challenges facing households have passed.

“It’s particularly encouraging to see the numbers of households in mortgage arrears stabilising, and the ‘payments shock’ for those coming off fixed rate mortgage deals does seem to have peaked, with savings levels starting to rise again. However, we know this will not be the case for all households and it’s important to stress that anyone who might be struggling can reach out to their lender for support.”

Simon Webb, Managing Director of capital markets and finance at LiveMore, said “It’s gratifying to see lending growth finally emerge in Q2, but taking out longer term mortgages grew alongside this. Since 2010 there has been an emerging pattern of people stretching their mortgage affordability by taking out a term of 30 years or more.

“A combination of rising inflation, mortgage rates and the cost of living accelerated this in 2023 and UK Finance says this trend has continued in Q2 of 2024, still primarily to stretch affordability as much as possible to get the loan size needed to keep up with ever increasing house prices.

“Borrowers are opting for mortgages of 30+ years but there are also options for fixed for life mortgages. These are repaid when the borrower passes away, moves into care or sells up. With a rapidly growing ageing population we need to cater for their financial needs and that includes creative mortgages options.”