Mortgage borrowing for home purchases has declined sharply year-to-date, with activity down nearly a third compared to the same period in 2022.
According to UK Finance, purchases by first-time buyers and movers fell by 28 and 30 per cent respectively in the three months between April and June this year compared to the same period last year.
Higher interest rates and uncertainty about house price developments are believed to be the main reasons for this decline in mortgage activity.
Mortgage Shortage: Higher interest rates and uncertainty about house prices have led to a decline in mortgage-financed home purchases this year
With house prices still near historic highs, interest rates rising and the cost of living rising, some borrowers are finding it harder to pass the current regulatory affordability tests.
Chris Sykes, technical director at mortgage broker Private Finance, believes demand will start pouring back into the market towards the end of the year.
He says, “I would say we’re probably going to see another drop and then it’s going to pick up again because now we have a whole pent-up demand from people who have been putting off shopping again because they want to move.”
“Other movers may be tempted to scale up their plans by delaying or abandoning those plans altogether, but often people still want to move — all they have to do is reassess their budget.”
“People are definitely adjusting to the current prices and we’ve seen an increase in interest from buyers over the past few weeks.”
Buyers don’t want to stretch their finances too far
According to UK Finance, over the course of 2022 there has been a rapid increase in the proportion of mortgage customers taking out loans for longer periods to extend their affordability.
For example, more and more borrowers would choose to repay their mortgage over a 35 year period instead of 25 years.
This helped reduce monthly repayments. However, this also meant they had to pay more interest over the life of the mortgage.
According to UK Finance, this trend seems to have weakened in the first half of this year.
It also means fewer borrowers are now trying to borrow the maximum amount their annual income will allow.
It said a higher proportion of mortgage purchases were funded by those with larger deposits or higher incomes.
Since many are hoping for lower interest rates in the future, more and more borrowers are also opting for a two-year fixed interest rate.
Nicholas Mendes, mortgage technical manager at brokerage John Charcol, says: “Mortgage affordability constraints and confidence will continue to be under pressure in the final months of 2023.”
“Mortgage rates will continue to remain relatively high and show no signs of abrupt relaxation.”
“Many mortgage holders are locked into longer-term fixed interest rates, with a higher proportion coming out of these deals in 2024 compared to this year, which will increase pressure on future buying activity if interest rates remain higher than expected for longer than expected.”
“Two-year fixed rates will be the default option for many mortgage holders over the next 12 months as those looking to relocate await market stability and interest rates to stabilize to maximize borrowing affordability.”
Those who reschedule stay with the same lender
Affordability issues are hampering some borrowers’ ability to switch their mortgage to another lender. More and more people are choosing to stay with their same lender through what is known as a product transfer.
The advantage is that borrowers don’t have to go through the same checks as when switching to a new lender – although this may also mean they don’t get the best possible deal.
According to UK Finance, between April and June, 84 percent of debt restructuring deals were internal product transfers.
In April alone, the figure hit a record monthly high of 88 percent – compared to the average for all of 2022 at around 77 percent.
While those who have rescheduled are now paying significantly higher rates, those rates remain below previous stress test rates.
Although that earlier stress test was reportedly eased last year when the Bank of England dropped its obligation for lenders to conduct an affordability stress test.
Previously, this meant that borrowers had to prove that they could still afford to repay their mortgage if their mortgage rate went 3 percent above their lender’s standard variable rate.
For example, if someone paying off a five-year fixed-rate mortgage this month goes through a stress test at a rate 3 percent above the same lender’s standard variable rate — the higher rate people have to fall back to at the end of a mortgage deal if they don’t do it on time rescheduling.
According to Moneyfacts, the average SVR in August 2018 was 4.72 percent. If you add another three percent, you get 7.72 percent – an interest rate that fixed-rate mortgages have not yet reached.
Protected: While those who have rescheduled are now paying significantly higher rates, those rates are below previous stress test rates
UK Finance says that thanks to this previous stress test, many customers will still stay within budget limits after the debt restructuring – although it could potentially mean cuts to other spending.
It also shows that the underwriting standards applied by the mortgage industry and enshrined in FCA rules since 2014 are doing their job, ensuring that customers’ finances are resilient to even the significant payment shock many are now experiencing.
Eric Leenders, managing director of personal finance at UK Finance, said: “Around 700,000 borrowers canceled their fixed rate contract in the first half of this year and likely found themselves with a much higher interest rate, which has kept it broadly affordable as a result of the “stress tests”. that applied when the mortgage was originally taken out.
“But circumstances can change. So if someone is struggling with their mortgage payments, they should contact their lender who will provide them with a range of tailored support.”
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