Mortgage lending up despite affordability challenges

Mortgage lending continued to grow in the third quarter, despite ongoing affordability challenges.

The latest quarterly report from UK Finance shows a 15% increase in mortgage completions in July-September compared with the same period a year ago.

Separate figures from the Bank of England reveal that net mortgage approvals for house purchases rose by 2,200 to 68,300 in October, the highest level since August 2022.

Affordability remains a problem for many borrowers, however. Mortgage rates are still high when compared with the period from 2008 to 2022, while house prices have risen faster than average earnings.

And a report from the Bank of England has warned that around half of all existing mortgage holders in the UK could see their monthly payments increase over the next three years.

Borrowers 'price sensitive' in 2024

Mortgage activity throughout 2024 has been very sensitive to changes in product pricing, UK Finance reported in its Household Finance Review for Q3 2024.

Application volumes increased in the third quarter as lenders were able to reduce prices further. This points to further lending growth in the final quarter of 2024, the industry body said.

Although affordability challenges have eased over the course of the year, they continue to impact both home buyers and those looking to remortgage.

For first-time buyers, despite the downward movement in rates this year, other factors including rising house prices are pushing affordability metrics back towards levels seen late last year, the Household Finance Review noted.

Internal product transfers, where an affordability assessment is not needed, remain a popular way of remortgaging and accounted for 83% of all refinancing agreements in Q3.

Impact of higher rates still not fully passed through

Over a third (37%) of fixed rate mortgage accounts have not re-fixed since rates started to rise in the second half of 2021, which means that the full impact of higher interest rates has not yet passed through to all mortgage holders.

According to the Bank of England's latest Financial Stability Report, 50% of mortgage accounts (4.4 million mortgages) are expected to refinance onto higher rates between now and the end of 2027 -- including hikes of over £500 per month for around 420,000 households. About 2.7 million homeowners will refinance onto a mortgage rate of over 3% for the first time.

A typical owner-occupier coming off a fixed rate in the next two years will see their monthly mortgage repayments increase by around £146.

Conversely, around a quarter of borrowers are set to see payments fall as rates have dropped from the highs seen in 2023.

The central bank said that overall household finances had remained resilient.

"While many UK households, including renters, are still facing pressures from the increased cost of living and higher interest rates, the share of households who are behind in paying their mortgages is low by historical standards," the Financial Stability Report said.

"And the share of households spending a high proportion of their income on mortgage payments is expected to remain low."

Gradual improvement

Eric Leenders, managing director of Personal Finance at UK Finance, said that although the challenges facing households are "far from over", the picture that's emerging is one of gradual improvement.

"We know this will not be the case for all households though, and I'd encourage anyone who might be struggling to reach out to their lender for support," Leenders added.