"Q2 is likely to show the trend turning upward but, unfortunately, that may well be short lived as the Bank continues to struggle to bring inflation under control."
Gross mortgage advances and new mortgage commitments are both at their lowest levels since the Covid-19 pandemic, according to the latest Mortgage Lenders and Administrators Statistics from the Bank of England.
The outstanding value of all residential mortgage loans was £1,675.4 billion at the end of Q1 2023, 2.7% higher than a year earlier, but a decrease on the previous quarter for the first time since Q2 2017.
The value of gross mortgage advances in Q1 was £58.8 billion, £22.9 billion lower than the previous quarter and 23.6% lower than in Q1 2022. This was the lowest observed since Q2 2020.
The value of new mortgage commitments was 16.1% less than the previous quarter and 40.7% less than a year earlier, at £48.9 billion. This was also the lowest observed since Q2 2020.
The share of gross mortgage advances with interest rates less than 2% above base rate rose by 7.7 percentage points to 93.9% - the highest seen since Q2 2008.
The share of gross mortgage advances with LTVs exceeding 90% was 4.0%, broadly unchanged from a year earlier but a 1.1pp decrease compared to the previous quarter.
The proportion of lending to borrowers with a high loan to income ratio decreased by 5.6pp on the quarter to 43.7% in 2023 Q1, the lowest seen since 2020.
The share for house purchase for owner occupation was 50.1%, down 0.6pp from 2022 Q1 and the lowest since Q2 2020. The share of gross advances for remortgages for owner occupation was 34.8%, an increase of 5.8pp since 2022 Q1, and the highest observed since Q2 2020. The share for buy-to-let purposes was 9.8%, the lowest observed since Q4 2011.
The value of outstanding balances with arrears increased by 9.5% over the quarter and 12.5% over the year, to £14.9 billion, and now accounts for 0.89% of outstanding mortgage balances.
Karen Noye, mortgage expert at Quilter, said: "This morning’s mortgage statistics paint a worrying picture with more people finding it hard to pay off their mortgages and less people taking out mortgages in the first place. The net impact of this will inevitably be felt in house prices which have already tumbled over the past few months. If repossessions start to increase and the market becomes flooded during a period where demand is lacking it will have a damaging impact on house prices.
"The value of new mortgage commitments, which essentially means lending agreed to be advanced in the coming months, was a huge 40.7% less than a year earlier, at £48.9 billion. This was also the lowest observed since 2020 when lending ground to a halt as the nation adjusting to the new conditions of lockdown.
"Unfortunately, the value of outstanding balances with arrears also increased by 9.5% over the quarter and 12.5% over the year, to £14.9 billion in 2023 Q1. This now accounts for almost 1% of all mortgage balances. This shows the ugly impact of the cost of living crisis which is pushing budgets to the very limit and sometimes over.
"Sadly, the picture is likely only set to get worse in the short term as once again the mortgage market has gone through a very turbulent period over the last week with rates getting ever more expensive piling even more pressure on already stretched budgets. The withdrawal of mortgage products and increasing rates by lenders over the past few weeks have been driven by a number of factors. The prevailing reason for this shift is the higher-than-expected inflation rate of 8.7% in April fuelling predictions that the Bank of England will raise interest rates to a higher level than previously thought. This fear has made some of the big name lenders cautious and prompted them to withdraw products and then raise their rates to safeguard against future losses.
"Before these recent developments, the sector was seemingly in a stable state since the spike in rates around November of last year. This stability was likely due to the economic outlook looking more predictable with interest rates set to peak at around 5%. But the higher than expected CPI figures and particularly the core inflation figures once again set the market off course again. The revised interest rate peaks of 5.5% sent many banks and building societies into a bit of a frenzy again. It is still nothing like after the mini-budget but it is not exactly what the market needs right now considering house prices are continuing to drop."
Mark Harris, chief executive of mortgage broker SPF Private Clients, commented: "These figures show a housing market settling into a ‘new normal’ following the pandemic and stamp duty holiday, with gross mortgage advances and new mortgage commitments at their lowest observed levels since the second quarter of 2020.
"Rates continued to edge upwards with the share of gross mortgage advances with interest rates less than 2% above base rate rising 7.7 percentage points to 93.9%. Borrowers will be all too aware of the rising cost of mortgages following the flurry of repricing upwards over the past couple of weeks, although things seem to be starting to settle on that front.
"Reassuringly, lenders and borrowers continue to demonstrate caution with only 4% of gross mortgage advances with an LTV of more than 90%, a 1.1 percentage point decrease from Q4 2022. High loan-to-income ratios also reduced by 5.6 percentage points to 43.7%, the lowest seen since Q2 2020 as borrowers avoided overstretching themselves given the uncertainty with regard to future rate rises.
"The share of gross advances for remortgages picked up as borrowers were spurred on to secure a deal and perhaps move off their lender’s standard variable rate given rises in interest rates. However, buy-to-let lending dipped to 9.8% of the total, the lowest since Q4 2011, perhaps reflecting a decline in the attractiveness of the sector for novice landlords at least given tax and regulatory changes, as well as rising mortgage costs."
Adam Oldfield, chief revenue officer at Phoebus Software, added: “The figures from the Bank of England today confirm the downward trend in mortgage lending. Understandable, when you consider the turmoil in the final quarter of 2022. Q2 is likely to show the trend turning upward but, unfortunately, that may well be short lived as the Bank continues to struggle to bring inflation under control. We only have just over a week to wait to find out what the MPC will decide regarding interest rates, but in truth we are all just waiting to see how big the increase is, rather than whether there will be one. The coming months are going to be testing for the housing market, which bears the brunt of these rate rises.
“The fact that the number of mortgages slipping into arrears is increasing is worrying but not unexpected. With the ONS reporting that 1.4 million UK households will see their fixed rate deals come to an end in 2023, this is not a short-term worry. This prospect has the potential to stall the market further and house prices could start to tumble. Brokers and lenders are undoubtedly facing a challenging time, but where there is challenge there is usually opportunity. Identifying those opportunities whilst looking after the more exposed borrowers will be the most important thing.”
