Mortgage lending remains subdued as high rates put off borrowers

Hopes for a rebound in the mortgage market in the first half of 2024 have been dashed by fresh lending data, as appetite for home loans was hit by reduced optimism over interest rate cuts from the Bank of England.

Borrowing for homebuying was down in the first three months of this year compared to the same period in 2023, according to the latest figures from the bank trade body UK Finance.

The number of new loans for first-time buyers fell three per cent to 66,410, while loans for home movers dropped 6.6 per cent to 54,720.

Even still, the rate of decline has slowed significantly from double-digit contractions seen throughout last year as prospective borrowers were put off by interest rate hikes and affordability pressures.

Expectations of near-term rate cuts from the Bank of England triggered a price war among lenders at the end of last year that spilt over into the start of 2024, prompting a surge in mortgage applications.

According to central bank data, UK mortgage approvals hit their highest level in 17 months in February.

However, increased applications have yet to translate into any actual rise in mortgage lending.

The Bank of England is now widely expected to cut rates in either August or September, with predictions pushed back following hotter-than-expected inflation figures for April last month. Markets are now betting on two rate cuts in 2024, down from six at the start of the year.

UK Finance added that while it expected “some growth” in the second quarter, the overall outlook for mortgage borrowing remained challenging “until affordability recovers to more sustainable levels”.

“Some households were in a better place financially in Q1 this year, but we are not out of the woods yet,” said Eric Leenders, managing director of personal finance at UK Finance. “Cost of living pressures remain, and with 1.6m mortgages due to come off fixed rates this year, there may be challenges ahead for some.”

For those who did secure a mortgage, the trend of borrowing at longer terms to reduce monthly repayments remained high, with 21 per cent of new first-time buyers extending terms over 35 years.

Affordability pressures also drove a 21 per cent year-on-year decline in external lending. Meanwhile internal product transfers, where an affordability assessment is not required, remained popular and grew nine per cent.

The number of mortgage customers in arrears grew to 110,150 in the first quarter from 107,250 cases in the previous three months. There were 1,470 mortgage repossessions at the start of 2024, below pre-pandemic levels.