Mortgage lending set to fall amid affordability pressures

Lending for house purchases is expected to fall by 8% in 2024 as high interest rates and household costs continue to make it hard for buyers to pass affordability tests.

UK Finance, the trade association for the UK banking and financial services sector, has predicted that mortgage lending for house purchases in the UK will decline to a total of £120bn from £130bn in 2023.

James Tatch, head of analytics at UK Finance, said that 2023 was a “challenging year” for both prospective and existing mortgage borrowers, with affordability pressures from higher interest rates and increased living costs as well as house prices still at elevated levels relative to income.

Rental costs and mortgage affordability

Increases in rent have contributed to the affordability squeeze, making it even more of a challenge for first-time buyers to build up a big enough deposit for a mortgage.

The average rent on a home in Great Britain now costs 55% more than it did a decade ago, according to research by estate agency Hamptons.

At £85.6bn, the total rent bill in England, Scotland and Wales is more than double what it was in 2010 (£40.3bn) — partly because rents have gone up and partly because the number of households renting has increased by 25% over that period as Millennials (born 1980-1994) have become trapped in the rental market due to mortgage affordability struggles.

There is some light on the horizon for renters, however, with property website Zoopla reporting that we are now past the peak of rental growth and the slowdown is expected to pick up speed over 2024.

“The supply-demand imbalance in rented housing is not going to disappear in 2024; however, the market is set to become more balanced than it has been over the last three years,” said Richard Donnell, executive director at Zoopla.

Mortgage rates ‘gently falling’

With the Bank of England recently holding interest rates at 5.25% for the third time in a row, mortgage costs are expected to continue their gradual decrease.

“Rates have gently been falling since early August due to a combination of factors including falling inflation, base rate pauses and reductions in swap rates,” explained James Hyde from financial data specialist Moneyfacts.

“In recent weeks, a number of lenders have begun to offer sub-5% two-year fixed deals, with the lowest rates available UK-wide sitting around 4.75%,” Hyde added.

Investors anticipate that the next change in the base rate will be a cut in spring 2024.

Gradual recovery in lending

UK Finance confirmed that the main pressures on mortgage affordability appear to be peaking and the lending outlook is brighter in the longer term.

“By 2025, the combination of wage growth, softer house prices and inflation and interest rates falling back somewhat will see a gradual recovery in lending activity as affordability improves,” the trade body said.