House purchase lending begins sustained year-on-year decline

House purchase lending in the UK has fallen year on year in every month since December 2022, according to UK Finance's Household Finance Review for the third quarter of 2023, published in December 2023¹. The trade body said the contraction in house purchase lending continued through the third quarter, and that indications point to a further contraction in the fourth quarter¹.

UK Finance attributed the decline to cost-of-living pressures and higher interest rates, which it described as a significant barrier to mortgage affordability¹. It said mortgage lending is weak in almost every segment of the market, most acutely at the tighter end of affordability, particularly lending at higher loan-to-value ratios and income multiples¹. Customers with lower incomes are currently putting down deposits equal to twice their annual income in order to meet affordability requirements, the review said¹.

The review covers consumers' financial behaviour through the third quarter of 2023¹. Over that period, UK gross domestic product was unchanged from the second quarter, and household spending contracted by 0.4 per cent, which UK Finance described as the fastest pace of decline for a year¹. CPI inflation fell to 4.6 per cent in October, which UK Finance said was mainly due to a reduction in the energy price cap; core inflation and services inflation posted annual increases of 5.7 per cent and 6.6 per cent respectively¹. The Bank of England's Monetary Policy Committee voted to retain Bank Rate at 5.25 per cent at both its September and November meetings, with the decisions not unanimous¹.

Mortgage refinancing remained strong in the third quarter, and affordability pressures alongside competitive retention deals drove more customers to take a product transfer with their existing lender¹. Households continued to run down savings to cover increased monthly bills, with no sign at that stage of increased reliance on overdrafts or credit cards to cover shortfalls¹. Arrears rose by more than expected in the third quarter, with signs of further increases ahead, though cases remain mainly older mortgages¹. Possessions fell slightly and remain at historically very low levels; UK Finance said no possessions related to arrears newly arising amid cost-of-living and interest rate pressures are expected until the end of 2024 at the earliest¹.

Why it matters for households

The decline in lending affects people buying a home with a mortgage, including first time buyers and home movers, and it has run every month since December 2022¹. UK Finance's account of the market points to affordability rather than supply as the constraint: higher rates and living costs are limiting how much buyers can borrow, and lower-income households are reported to be putting down deposits equal to twice their annual income to meet lenders' requirements¹. For existing borrowers, the third quarter saw more customers move onto a product transfer with their current lender rather than remortgage elsewhere¹. Households also continued to draw down savings to meet monthly bills, and arrears rose by more than expected, with UK Finance warning of further increases ahead¹. Its assessment is that possessions linked to arrears newly arising from cost-of-living and interest rate pressures are not expected until the end of 2024 at the earliest¹.

What happens next

UK Finance said indications are that the fourth quarter will show a further contraction in house purchase lending¹. The Bank of England forecast no GDP growth through 2024, and UK Finance said the committee is likely to hold rates at current levels in the near term, with consideration of interest rate cuts still some way off¹. In the Autumn Statement, the Chancellor announced additional spending and tax cuts amounting to around £17 billion per year over the forecast period, including a 2p cut to the main rate of employee National Insurance contributions, an extension of the mortgage guarantee scheme to June 2025, uprating of working age benefits by inflation and further support for job seekers¹.