Household finances calm, but storm clouds gathering

In our latest Household Finance Review, in collaboration with Accenture, we look at the trends in consumer borrowing and spending in Q1 2022. Despite clouds brewing on the economic horizon, the broad aggregate picture as 2022 began could be summarised as “so far, so good.”

The topic on most commentators’ lips since late last year has been the challenges to household budgets from tax changes and much higher inflation than the country has experienced since the early 1990s. Although much of this did not come to bear until early Q2, rising costs had already started to make a dent in wallets and in consumer confidence. 

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However, despite consumer confidence - in both the economy and their own financial situations – reading its lowest since well before the pandemic struck, this was not echoed in spending or borrowing data in Q1.

Spending appears broadly back to pre-pandemic trends, with increases in Q1 seen in the entertainment and travel sectors, which were amongst those most subdued over the past two years (Chart 1).  

Personal loans borrowing (excluding car finance), which is an indicator of households’ appetite to take on debt to fund more expensive items, also saw an increase in the quarter. It is possible that some of this strength reflects consumers bringing forward such purchases to avoid paying even more at a later point as inflation continues to trend higher, and also in response to the ongoing global supply issues (eg: buy now, it may not be available next week).

​​​Chart 1: Credit card spending in month

HFR - Chart 1 - Credit card spending in month

Source: UK Finance

Mortgage lending trends in Q1 are distorted by the inflated volumes seen this time last year as borrowers took advantage of the Stamp Duty holiday. However, underneath the year-on-year contraction from this previous distortion it is possible that there may still be some persistent stimulus to purchase demand from the changes to living and working patterns that look to have outlived the pandemic itself.

The main strength in the mortgage market, both in Q1 and as we move through 2022, comes from refinancing, with increased volumes of fixed rate mortgages are set to come to the end of their deal rate and borrowers look for a new deal.

As well as these increased volumes looking to refinance on to a new deal rate, we are also seeing persistently higher amounts of equity withdrawn at remortgage to fund home improvement, with the building sector facing significantly increased costs both for labour and materials.  

Looking ahead, there are clearly challenges to affordability, both for new mortgages and the ongoing position of current mortgage holders, as cost of living pressures increase.  Using our loan-level data, we have modelled the effect of these combined pressures on the typical mortgage borrower.  Overall, the changes to disposable income and household expenditure through this year look would remove around three per cent of the flex in the average borrowers’ household balance sheet (Chart 2).

This suggests a relatively modest impact on affordability on average.  However, as Chart 2 shows, the impact is uneven, with those in lower income brackets typically having considerably less wiggle room on than those in higher brackets, and also seeing a proportionally greater negative hit from the cost-of living pressures.

Chart 2: Wiggle roomin mortgagors’ budgets, before and after 2022 inflation and disposable income effects, 2021 originations 

Wiggle room in mortgagors’ budgets, before and after 2022 inflation and disposable income effects, 2021 originations

Source: UK Finance
1 Wiggle room defined as the proportion of net income left after subtracting initial mortgage payments, basic household expenditure and credit commitments.

So, while cost-of-living pressures may exert only a modest downward pressure on effective demand for mortgages, this is likely to be skewed towards lower income sectors and regions of the country.

We also see the same “so far, so good” story in secured and unsecured debt problems; overdraft usage continues its gradual return to pre-pandemic trend rather than any unexpected sharp increase, and the proportion of credit card balances that are not paid off each month (and therefore attract interest) continues to trend down. On the secured side, mortgage arrears are also still falling, with UK Finance figures showing declining numbers of borrowers in both early and heavier arrears.

As with initial affordability, the outlook for mortgage arrears is likely to be more challenging as cost pressures weigh more heavily from Q2 onwards. Again, aggregate data suggest most households are well-placed to absorb these pressures but some, particularly in lower income sectors, will face greater difficulties in meeting their mortgage and other credit commitments.

As always, any customers facing difficulty meeting their mortgage or other credit commitments are encouraged to talk to their lender at an early stage. The banking and finance industry stands ready to help with a range of forbearance tools.

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