Mortgage affordability pressures saw the number of homemovers in the market fall to the lowest level since 1974, industry data showed.

The UK Finance Household Review revealed that, in 2023, there were 251,000 loans issued to homemovers – a drop of 26 per cent on the year before. 

First-time buyer numbers fell to 287,000, which was a 22.4 per cent fall. 

UK Finance said that, while it appeared surprising that first-time buyer numbers fell less significantly due to tighter affordability, there were factors supporting the market, such as the stamp duty exemption and help from the Bank of Mum and Dad. 

Still, first-time buyer numbers dropped in a 10-year low. 

In all, there were 538,000 residential purchase loans completed throughout the year, a 24.1 per cent decline on 2023. This was also lower than the pre-pandemic total of 695,000. 

Gross mortgage lending dropped annually by 28.6 per cent to total of £223.5bn in 2023. 

Shift to product transfer to continue

UK Finance said affordability pressures also impacted mortgage refinances, as external remortgaging fell by 18.5 per cent annually. At the same time, there was a 17.1 per cent growth in product transfer activity. This was the only area of mortgage business to grow in 2023. 

Although the market was weaker across the whole of the UK, with double-digit declines, this was most notable in London and the South East, UK Finance said. It attributed this to constrained affordability due to higher house prices. 

Its data showed that nearly nine in 10 refinancing borrowers chose a product transfer in December and, over the year, “more customers than ever remained with their existing lender”. 

Affordability tests taken out when the mortgage was issued meant that, even with the rise in rates, borrowers were able to cope with the rise in payments. 

A further 1.6 million fixed rate mortgages are set to expire this year, higher than last year’s 1.5 million. UK Finance said that with rates reaching a peak in 2023, the payment shock would be less severe for people refinancing this year, but the rise would still be significant and continue the push toward product transfer. 

Possible Q1 recovery following Q4 decline in activity

UK Finance said the year ended with a double-digit percentage drop in lending numbers, with first-time buyer and homemover numbers falling 23 per cent and 26 per cent respectively in Q4. 

The body said the strong labour market meant there were not as many “forced sellers”, resulting in fewer properties for sale. This led to house prices only falling “modestly”, and UK Finance said there were signs that prices were starting to rise again, which would mean a “slower adjustment process” for buyer affordability. 

However, UK Finance said there was an uptick in mortgage applications in Q4, which pointed to growth in 2024. 

The body said that, with affordability still tighter than recent years, there would be market growth in Q1, but this would be low compared to historical norms. 

This year’s market will still be “soft” with “affordability pressures”, UK Finance predicted. 

Use of longer mortgage terms reaching limit 

UK Finance’s figures showed that the share of mortgage terms of longer than 30 years levelled off in 2023, after a quicker rise in 2022. 

It said this might suggest the extent to which it was being used was “reaching its limit”. 

Mortgages of 30 years or longer were relatively unchanged among homemovers in Q4 and rose for first-time buyers, “but at nowhere near the pace seen through 2022”. 

However, UK Finance said there was a continued, faster rise in borrowing for more than 35 years, meaning where longer mortgages were being used to improve affordability, they were being lengthened further. 

At the end of the year, nearly a fifth of first-time buyers borrowed over more than 35 years, compared to less than a tenth in 2022. 

UK Finance questioned the effectiveness of longer mortgage terms regarding improved affordability. 

It suggested that compared to the relative stability in 2022’s mortgage market where the average mortgage term for a first-time buyer was 30 years, 2023’s market would have required a 50-year term to match the same affordability. 

Based on rates at the end of 2023, the same borrower from 2022 would need a mortgage term of 72 years to have the same level of affordability on their initial payments. 

The body noted that a 50-year term sat outside most lenders’ criteria but showed why borrowing terms had extended so much. Even so, some borrowers still failed affordability tests, which subsequently led to the drop in lending volumes. 

Although rates have started to fall, UK Finance said many potential borrowers would still not reach affordability, even over longer mortgage terms. 

Mortgage arrears up, possessions flat 

Mortgage arrears have started to pick up from their record low levels and, by December, there were 107,250 mortgages in arrears of 2.5 per cent or more of the outstanding balance. 

UK Finance said arrears were still “very low by historical comparisons”, but noted an eight per cent rise from Q3 to Q4. Arrears were also 32 per cent higher than in December 2022, when they first started to rise. 

Arrears are expected to continue rising in 2024, but if no more financial pressures hit borrowers, this should not rise at the same rate as 2023. 

Apart from the suppressed activity during the pandemic because of a moratorium on possessions, the 4,620 possessions in 2023 were the lowest since 1980.

This was an 18 per cent rise on 2022. UK Finance said this annual increase did not point to a change in market conditions, as possession numbers in 2022 were “artificially suppressed”. 

It said the possessions were also not a result of mortgage arrears from last year, and most were cases that were being processed after years of built-up arrears. 

The historical backlog has now been cleared, UK Finance said, meaning a return to normal timelines for arrears to possession, which are around 18 months to two years. 

Shekina is the commercial editor at Mortgage Solutions, YourMoney.com’s sister title in the B2B industry. She has over four years’ experience in the B2B publishing market, with previous industries including the accounting, pet, funeral, hospitality, retail and jewellery trades.

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