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Healthy levels of applications at the end of last year and the beginning of 2024 supported the mortgage sector’s growth in Q2, data from a trade body showed.
The UK Finance Household Finance Review showed that while there was a quarterly decline in application volumes during the period, first-time buyer application numbers were 19% up on the year before, while homemover applications were 15% higher.
The trade body said the short boost in applications between late 2023 and early Q1 this year was finally translating into a growth in lending.
UK Finance said the time it took from application to completion suggested there would be continued mortgage lending growth in Q3 compared to 2023, as applications from Q1 fed through.
However, it said the comparatively low levels of applications in Q2 could dampen this strength through to the end of the year.
Despite application growth in the second quarter, lending levels were still down on the same period in 2023 and 16% down on 2022.
UK Finance said its view that lending would be subdued this year remained unchanged as the mortgage applications in Q2 returned to the “depressed levels seen in 2023”.
Borrowers still stretching mortgage terms
UK Finance found that people were still extending mortgage terms over longer periods to improve affordability and the share of borrowers doing this had reached a high.
More than a fifth of first-time buyers, a tenth of homemovers and one in 20 of those remortgaging had taken out loans on terms of 36 to 40 years in Q2.
Rapidly rising interest rates resulted in borrowers pushing mortgage terms to the limit, but UK Finance found this was not always done to pass lenders’ underwriting criteria. It found borrowers were stretching terms even when they would have passed affordability so they could lower their payments and use their income on other household expenses.
The body said although pressures from high prices and interest rates had eased, financial constraints were still present.
It said falling mortgage interest rates had the greatest impact on improved affordability, but noted this had been “modest”.
Extended mortgage terms not always impacting retirement
Although the data showed people were borrowing over longer periods, few borrowers were found to be still paying off a homeowner mortgage in retirement.
Of the nearly 90% of outstanding capital and interest mortgages, just 3% are held by borrowers who are currently aged over 65. Additionally, just 16% of people still paying a mortgage are aged between 55 and 65.
Around 10% of outstanding mortgages are interest-only, and a higher share of these borrowers are nearing or in retirement. UK Finance’s data showed 41% of interest-only mortgage borrowers were aged between 55 and 65, while 15% were 65 and older.
The trade body said this was also due to lower levels of interest-only lending taking place over the last decade.
Muted refinance activity
In Q2, 408,000 mortgages were refinanced, a 5% contraction on the previous quarter and a 12% reduction on the same period a year ago.
More borrowers chose a product transfer instead, continuing a trend seen for the last two years. In Q2, product transfers accounted for 82% of refinancing.
Some 700,000 fixed rate mortgages are set to mature during the second half of this year and a further 1.8 million in 2025.
UK Finance said as affordability pressures eased, there should be a shift back to remortgaging.
Worst of the payment shocks have passed
UK Finance said the payment shock faced by refinancing mortgagors due to rising rates seemed to have peaked. It found that although borrowers were refinancing at rates 3% higher than their previous product, it was typically more than 1% less than their stress rate suggesting this was within what their lender deemed affordable when they first took out the mortgage.
Since then, refinance rates have continued to fall, and borrowers have been able to manage the rate rises because of these affordability rules.
“The extent of this payment shock is likely to ease further through this year and next,” it added.
Mortgage arrears stabilise
In Q2, UK Finance found the number of mortgages in arrears was flat on the previous quarter, falling marginally from 109,900 to 109,700. There were similar falls in the number of accounts in early arrears.
UK Finance said this suggested flat or modest falls in arrears levels in Q3.
However, it noted a rise in the number of borrowers who fell into deeper shortfalls and said it was too soon to say the overall decline in arrears was a trend.
UK Finance said: “Cost-of-living and interest rate pressures may have peaked but they are still very much present and felt acutely by many households, as evidenced by the numbers in arrears seeing their positions worsen as these pressures persist.”
The number of possessions rose but were still at historically low levels.
In Q2, there were 1,620 possessions – 34% more than the year before – but UK Finance said these were mostly cases that were previously suspended during the pandemic now coming through.
Otherwise, possessions remain below the averages of 2,000 per quarter seen in the five years before the pandemic.
Shekina is the deputy editor at Mortgage Solutions and commercial editor at Mortgage Solutions and Specialist Lending Solutions. She has nearly eight years of experience in the B2B publishing market, having previously covered the hospitality, retail, pet, accounting and jewellery sectors.
Shekina has worked for Mortgage Solutions and Specialist Lending Solutions for almost five years. Here, she covers the market’s breaking news stories, engages with professionals in the sector, and oversees any commercially agreed content in partnership with mortgage-related companies.
This includes presenting webinars and hosting roundtable discussions on developing themes in the mortgage sector.
She is an NCTJ-trained journalist and was nominated for the Headline Money Awards Mortgage Journalist of the Year in 2021.
In her spare time, Shekina likes to read, travel, listen to music and socialise with friends.
She currently reports on current events in the mortgage market and liaises with financial clients to produce sponsored content.
Follow her on Twitter at @ShekinaMS