High house prices and mortgage rates squeeze affordability for lower earners

First-time buyer households with lower earnings are needing to find deposits averaging nearly double their annual income to meet affordability requirements, according to a banking and finance industry body.

High house prices and high mortgage rates are squeezing affordability.

According to data from UK Finance, first-time buyers with a combined household income of less than £50,000 are putting down around 194% of their annual income down as a deposit. This compares with around 110% for those with an income of between £50,000 and £100,000.

Mortgage lending has been weak in nearly every segment of the market but can be seen most acutely at the tighter end of affordability, UK Finance’s household finance review for the third quarter of 2023 said.

Around 99% of borrowers are still able to meet their monthly repayments

UK Finance’s household finance review

The report said that in 2021 57% of first-time buyers had household incomes of less than £50,000. By 2023 this proportion had fallen to 46%.

The review said: “These customers are now having to put down deposits equal to twice their annual earnings, significantly more than in recent years.

“However, borrowers with higher incomes have not seen the same shift in increased deposit requirements.”

Lending for house purchases fell throughout the third quarter of 2023, continuing the trend that started at the end of 2022, with customers facing significant affordability constraints from increases in the cost of living and higher interest rates, the report said.

First-time buyer activity was down by nearly one fifth and activity among home-movers fell by a quarter, compared with the third quarter of 2022.

Mortgage refinancing remains strong, with affordability pressures and competitive retention deals driving nine out of 10 customers in 2023 to take a product transfer with their existing lender, the report said.

The report added: “While signs of unsecured debt stress are limited, mortgage arrears are rising. However, this is from a low base and around 99% of borrowers are still able to meet their monthly repayments.

“For those who are struggling, lenders stand ready to help with a range of tailored support options to best meet customers’ circumstances – the key is to discuss these options early to find the right form of support.”

There is still a huge gulf between current mortgage rates and the far lower fixed rates that many homeowners will be coming off

Laura Suter, AJ Bell

Jamie Alexander, mortgage director at Alexander Southwell Mortgage Services, told website Newspage: “The report reveals a bleak landscape for the UK housing market and highlights the grim state many household finances are in. The stark decline in mortgage lending, particularly for those at the lower end of the income spectrum, highlights a continued affordability crisis…

“The resilience in mortgage refinancing and low levels of repossessions, while reassuring, may only offer temporary relief in the face of broader economic uncertainties.”

Laura Suter, director of personal finance at AJ Bell, said: “Some homeowners might take comfort from the fact the Bank of England appears to have halted its rate-hiking cycle and that mortgage rates have subsequently dropped slightly.

“But there is still a huge gulf between current mortgage rates and the far lower fixed rates that many homeowners will be coming off.

“We know that around 1.6 million mortgage deals are due to end in 2024 and, until we see meaningful cuts from the Bank of England, those homeowners will still be paying hundreds, and in many cases thousands, more each year for their mortgage.”

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