UK Finance analysis shows effect of cost-of-living pressures on mortgaged households

UK Finance releases its latest Household Finance Review which reports on trends in household spending, saving and borrowing during the first quarter of 2022. The Review, produced in collaboration with Accenture, also includes new analysis on the potential impact of the cost-of-living challenge facing households this year.

UK Finance analysis on mortgaged households

In order to assess the potential impact of cost pressures coming this year, UK Finance has undertaken analysis on the impact of recent tax changes and inflation.

Our analysis finds 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.

We found 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.

Wiggle room in mortgage-holders’ budgets, before and after 2022 inflation and disposable income effects

The chart below shows the affordability position of borrowers in 2021, both at the time they took out the loans and then what their positions would look like after income and price changes come to bear over this year. This analysis considers confirmed income changes and inflation forecasts as of 19 May 2022.

Wiggle room in mortgage-holders’ budgets, before and after 2022 inflation and disposable income effects

Source: UK Finance

Area of expertise:

Notes to editor

1: Wiggle room defined as the proportion of net income left after subtracting initial mortgage payments, basic household expenditure and credit commitments.
2: We estimate uprated costs for 2022 using external forecasts for full-year 2022. Confirmed increases to National Insurance Contributions (NICS) are factored into net income. Any changes after 19th May 2022 are therefore not included.

First quarter house purchase activity and mortgage lending

The number of people moving home dropped 42 per cent compared to the first quarter of 2021 and the number of first-time buyers (FTBs) was down by 12 per cent.

Whilst we expect mortgage activity 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.

First quarter personal finance trends

Credit card spending and personal loan borrowing both increased in the first quarter of 2022, returning to pre-Covid trends as the last restrictions were ended.

Total credit card spending was £50.4 billion, with March seeing the second highest spending since the pandemic. There was a significant increase in credit card spending on travel as international holiday bookings took off.

Following sharp falls during the pandemic, outstanding credit card balances were broadly static over the quarter at £56 billion.

There were £4.7 billion of new personal loans made by high street banks in the first quarter.

The growth in savings eased, following substantial rises through 2020 and 2021. In total, there is £1.1 trillion held in savings accounts, of which 84 per cent is in instant access accounts.

Overdraft usage rose during the first quarter but remains below pre-pandemic norms. Total overdraft debt of c.£5.5 billion is around 15 per cent below the amount seen in 2019.

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.