In its latest Household Finance Review, which reports on trends in household spending, saving and borrowing during the first quarter of 2022, UK Finance found that the average mortgaged household will see a three per cent reduction in the amount of disposable income left over after mortgage, credit commitments and living costs.
However, the cost-of-living squeeze will be felt most acutely in lower-income brackets, which have around half the spare income of those in higher brackets, even before cost-of-living pressures are factored in.
UK Finance predicts that most borrowers across all income brackets would still qualify for the same sized mortgage now as they did last year. However, there will be some borrowers who would not qualify for the size of loan granted last year due to the new additional costs, which may result in a softening of demand for mortgages this year.
First-quarter house purchase activity and mortgage lending
The number of people moving home dropped 42% compared to the first quarter of 2021 and the number of first-time buyers was down by 12%.
Whilst mortgage activity is expected to be strong through this year, this will largely be driven by customers coming to the end of their fixed-rate deals and looking to switch to a better rate. This contrasts with previous years when a significant element of remortgaging activity involved borrowing substantial sums of additional money, in many cases to fund further property purchases.
Although there was a decrease in home movers and first-time buyers compared to the unprecedented highs of last year, numbers remain slightly above 2019 levels as the ongoing effect of the pandemic drives demand for more space.
Eric Leenders, Managing Director of Personal Finance at UK Finance, said: “During the first quarter of 2022 we saw the spread of the Omicron variant of Covid and consumer prices beginning to rise, although this did not translate to any drop off in spending or mortgage borrowing.
“However, we know that some people, particularly those on lower incomes, will already be feeling the strain. There are significant additional pressures on household finances in the second quarter, most notably from energy price rises and tax changes. Our analysis shows that this year there will be a three per cent fall in disposable incomes for the average mortgaged household, which may result in more subdued spending and borrowing.
“Any customers worried about meeting their loan payments should speak to their lender early to discuss the tailored support available to them. Lenders won't put customers on a plan that they can’t afford.”
Krishnapriya Banerjee, managing director in Accenture’s UK banking practice, added: “While the first quarter painted a fairly stable picture of the UK’s household finances, further potential interest rate hikes and energy price booms mean the full effects of the soaring cost of living have yet to bite into household budgets. Although many banks have started making provisions to support their most vulnerable customers, they also need to focus on communicating their empathy for consumers affected by this crisis. Banks need to strike the perfect balance of delivering digital services and human-centric banking to help customers navigate this challenging situation.”
Stuart Wilson, CEO at Air Mortgage Club, comments: “Although housing demand fell below the peak levels we saw during the Stamp Duty Holiday, today’s data demonstrates the true strength of the UK property market, which has weathered the recent spikes in the cost of living with relative ease.
“The outlook isn’t entirely without a cloud. Unsurprisingly, consumers may cut back on spending as a raised energy price cap and climbing inflation bite into pension pots and hard-earned savings. In the coming months, advisers in the later life finance sector will have a vital opportunity to help older clients achieve some peace of mind during an economically challenging time. Take the recent Equity Release Council statistics, which reported that over-55s released more than £1.5 billion worth of housing equity in Q1. With consumer spending beginning to reflect the ongoing cost of living crisis, an uptick in older clients boosting their income with equity release is a reassuring sign of a thriving sector.
“Although bills are increasing, advisers can be relied upon to deliver transparent and effective guidance. Their role in the market will doubtlessly remain essential – especially as older clients seek new avenues to secure the comfortable retirements they rightfully deserve.”
