Households have faced more than a year of high inflation and rising interest rates and the impact of both is becoming more apparent in UK Finance’s data. 

Squeezed budgets and higher financing costs are bearing down more heavily on affordability for prospective house buyers. The same pressures are, as expected, gradually pushing up the number of customers falling behind on their mortgage. 

While some households are under more financial strain and running down savings, for many the start of 2023 was still business as usual with patterns of spending and use of unsecured credit following the usual seasonal patterns.  

Mortgage lending  

Lending to both first-time buyers (FTB) and home movers fell to the lowest level since Spring 2020, when the housing market was largely closed during the first Covid-19 lockdown.  

Excluding that period of closure, FTB numbers were the lowest since 2015 and home mover numbers were the lowest since 2009.  Nevertheless, the proportion of FTBs taking out a mortgage with a term of over 35 years hit a record high in March at 19 per cent. Meanwhile, eight per cent of home movers arranged mortgages with terms over 35 years. 

This decline in activity is in line with our Market Forecast data as cost-of-living and interest rate increases tighten affordability limits, bearing down on effective demand for mortgage credit. 

As yet, there is no sign that the customers coming to the end of their fixed rate deals are seeing their refinancing options limited by the tighter affordability constraints from these cost pressures when simply moving to a new deal. However, these pressures may now be tempering the willingness and ability to borrow more against their home. 

Arrears and repossessions 

As we have previously reported, mortgage arrears rose in the first quarter, although this is from a very low base and in line with our expectations. However, any increase in arrears, even a modest one from a low base, is of concern and the industry is focused on helping customers navigate periods of increased financial stress. 

Our new analysis shows that there is a range of factors driving arrears, depending on differing household circumstances, and this argues for lenders retaining a flexible, tailored approach to supporting borrowers through financial challenges. 

Overall, around 80 per cent of all arrears customers are on variable rates. Given almost all new lending is on fixed rates, the vast majority of arrears cases are much older mortgages. 

Amongst early arrears cases (those under the 2.5 per cent threshold for “headline arrears”) a somewhat greater proportion are on fixed rates. These customers are still on relatively low rates and payment difficulties are, therefore, more likely to be a consequence of the cost-of-living squeeze. 

Household savings  

For the first time in at least 15 years, the household sector in aggregate saw a year-on-year contraction in the level of savings. The value of deposits in instant access accounts fell by four per cent to £867 billion compared with £905 billion the same point in 2022, and we are likely to see further falls in savings levels until current cost pressures ease. 

For households still able to put away money, the significantly higher rates on longer-term savings products have meant a 15 per cent increase in the value put away in notice accounts.  

Consumer spending 

Despite the headwinds for borrowers, for many consumers the start of 2023 was business as usual. Consumer spending typically sees a dip in the early months of the year following the festive splurge. 2023 started in similar fashion, with spending in supermarkets and other regular spend items seeing a seasonal contraction. However, this was offset by buoyant activity elsewhere, with a significant uptick in spending on travel, including with airlines. 

Eric Leenders, Managing Director of Personal Finance at UK Finance, said: 

Cost of living pressures and higher interest rates weighed on households in Q1. We saw the first year-on-year drop in savings levels in 15 years as people dipped into their savings pots to pay their bills and support usual spending.  

Meanwhile, mortgage lending dropped significantly at the start of the year, although some borrowers are still stretching affordability with longer term mortgages. More recently, uncertainty around the inflation outlook has led to another bout of elevated volatility in swap markets, leading to some repricing by lenders. While this persists, we expect near term mortgage market activity to remain relatively fragile. Borrowers coming to the end of their fixed-rate deal are encouraged to seek advice from a whole-of-market broker. 

As always, it remains crucial that customers worried about their finances speak to their lender at the earliest possible opportunity, so that they can discuss the options available for help.” 

Notes to editor 

• The Q1 2023 Household Finance Review can be found here.  

• UK Finance is the collective voice for the banking and finance industry. Representing more than 300 firms across the industry, we act to enhance competitiveness, support customers and facilitate innovation. 

• Please find here our latest Trends in Economy and Lending report.  

• Please see information here about the support available to help with the rising cost of living.