Lending to first-time buyers was at the lowest level since 2015 and movers at its lowest since 2009, according to the UK Finance Household Finance Review for Q1 2023, excluding the 2020 period of closure due to Covid.

Cost-of-living and interest rate increases seen over the past year were “baked into household budgets and affordability calculations”, the trade body said, adding the activity decline was in line with expectations.

It noted that this was “bearing down on effective demand” for mortgage credit, and looking ahead to Q2 the firm said that the rate of contraction in applications has “moderated” but that a “softer lending market” would continue over the coming months.

“Mortgage affordability, already stretched for many before the year began by rapidly rising house prices, looks to have become a barrier for increasing numbers, and this is likely to continue as we move through the year,” UK Finance noted.

Remortgage and product transfer activity

UK Finance said that at the end of 2022 that around 1.5m residential mortgages would come to an end this year. However, it said that in the first quarter there was an annual fall in external remortgaging, down 9% compared to the same period this year. UK Finance said that it forecast product transfers to be more popular due to affordability pressures.

It continued that while product transfer volumes tend to be “volatile”, the “relative strength” of simple external refinancing implies that affordability pressures are not driving higher volumes of customers towards internal refinancing”.

“At the same time, though, the same pressures may now be impacting adversely on the ability of customers to withdraw equity at remortgage,” it warned.

“The stretch in refinancing is likely to continue through the year as borrowers reach the end of their fixed rates. Within this, however, cost and interest rate pressures still have the potential to constrain the extent to which borrowers access external refinancing options, whether just for a new deal or to withdraw equity,” UK Finance explained.

Arrears and possessions rise

UK Finance stated that there was a 2,530 increase in arrears cases, bringing the total number of mortgages in arrears to 83,760.

The trade body said that there was also a “more material increase” in early arrears, defined at between 1.5 and 2.5% of the balance, which it noted could translate into a larger increase in headline arrears in Q2.

The firm said that these increases were in line with its expectations for arrears to reach 95,800 by the end of the year.

UK Finance said that this would represent a 21% increase on arrears at the end of 2022, but it said it was important to be mindful that the arrears picture to now has been “incredibly benign by historic comparison”.

It said if its projection played out, arrears would be in line with 2016 levels and less than half those seen during the global financial crisis.

The firm said that around 80% of all arrears customers were on variable rates, however, among early arrears cases around half are on fixed rates.

“These customers are on low rates – around 2.5% on average, which is not materially different to fixed rate customers not in arrears. Their current payment difficulties are unlikely, therefore, to be related to their mortgage rate.

“Rather, in the absence of any rise in unemployment, the cost-of-living squeeze is most likely to be the key stressor. These customers may, therefore, benefit most in the long term from help or advice in navigating these wider cost pressures,” it explained.

UK Finance said that lenders had proactively contacted customers 16.5m times to offer support, and this would rise to a further 20.5m contacts in the next 12 months.

On the possessions side, there were 1,250 mortgage possessions, up 28 per cent from the same period.

UK Finance said that it expected possession numbers to rise, with its forecast for the year set at 7,300.