Good afternoon and welcome to the UK Finance mortgage lunch. I hope you enjoy the afternoon and I should like to say a huge thank you to our sponsor Climate X for once again helping us put on this event.

Last year I spoke about home ownership and my belief that mortgages help provide homes rather than just houses, help fulfil dreams, and allow people to feel safe and secure. 

In times of stress in the market this comes even more into focus. Lenders have a responsibility to tread the fine line between enabling people to realise their dreams and not overextend themselves in the process.

So, this year I want to look at the market right now and with a particular focus on affordability and the impact it has.

We published our latest Household Finance review on Monday, and it had some really interesting analysis which I think highlights the current issue around affordability well.

Affordability is key and after multiple rapid interest rate rises the typical first-time buyer has been impacted greatly. In previous years they would often look to extend the term to deal with stress testing, reducing payments and pushing out the end date, but we’re reaching the limits of that.

To illustrate the point, we looked at a typical first time buyer in 2022, which was a relatively stable year, and the average mortgage term was 30 years.

But we then rolled forward the average change in house prices, mortgage rates and incomes to the middle of 2023. For that buyer to achieve the same affordability, as measured by their mortgage payments compared to income, they would have needed to borrow over a 50-year term. 

As rates rose through 2023 this calculation increased further.

A 50-year term sits outside any lender’s underwriting criteria and we’re not suggesting we want mortgages of this length. This does, however, demonstrate why we have seen such a significant increase in longer-term borrowing.

Although lending was down last year, there were still 287,000 loans with a value of £58 billion advanced to allow first time households to buy their own home. That is a staggering 33 first time buyer loans an hour!

It is hard to predict where the market might go next. Demand might pick up a little this year but affordability will likely still be stretched until rates start to drop. We are unlikely to see a return to very low interest rates so house prices may stagnate as incomes gradually rise and equilibrium is reached once more.

This squeeze on incomes has seen arrears rise, but the more stringent affordability tests of the last 15 years has protected lenders and borrowers to a great extent.

As a result, arrears remain at low levels when you look back at historical comparisons.

We can also see the impact in repossessions. In 2023 four thousand six hundred and twenty properties were taken into possession. Each case is a personal tragedy, but possession is always a last resort and they are at their lowest level, apart from the pandemic era, since 1980. And the mortgage market is more than double the size it was then. 

This combination of affordability stretch coupled with comparatively low arrears and repossessions made me wonder if the pendulum has swung a little too far? Are the FCA and PRA responsible lending rules preventing some people from buying their own home whilst trying to protect them? 

Is this causing lenders to be more risk averse than they could be? And what impact is this having on the economy, with lower economic activity resulting from a smaller mortgage market. Whichever party forms the next government they will have to wrestle with this as they are both looking to economic growth to help provide improved public services. Dampening down the mortgage market has a significant impact on that aim.

How will all of this play into Consumer Duty? As yet, it is the dog which hasn’t barked. When faced with the test of a good outcome for consumers will this push the risk appetite lower still as I have long feared? Or, can we reach a more mature balanced view that protects consumers, but not from all risk? There is a real and large economic consequence emanating from this debate and the role of the regulators and the ombudsman will be crucial in the trajectory we see from here on.

Last summer we put in place the Mortgage Charter, working with government and regulators. It drew together all the good work that lenders already undertook and it allowed people a capital holiday or a term extension. Significant numbers of borrowers took advantage of the Charter’s provisions and the industry’s Reach Out campaign really helped get the message of support out in that respect.

At the same time we were designing the Mortgage Charter, we were also in a lively debate around savings rate pass through. There was a view amongst some commentators that more should be done. However, when you looked at the data it showed the UK had a higher level of pass through than almost all European countries. And that if one shopped around there were, and still are, some great rates available. One and two year fixed rate deposits were close to or even slightly above base rate. Instant access rates were a bit lower, but again the data showed that even in this part of the market there were some great rates available in a competitive market.

One point we always make is you can’t look at mortgage rates or deposit rates in isolation – there is an interplay between them and intervention on one side of the balance sheet impacts the other side. The temptation for politicians and regulators to intervene in market pricing must be resisted. We must maintain the health of the market and reinvigorate the UK as a place where investors want to support financial services.

How we strike the balance between pricing and margin, and between risk and protection will determine our success, not just as an industry, but as an economy over the next few years and it will need government, regulators and lenders to be aligned for the outcome to be positive. I remain optimistic we can get the balance right. We have to, as the future prosperity of the country depends on us getting the pendulum in the right place.