There was a 15% annual rise in mortgage lending over Q3, suggesting further growth for the market going forward, industry data showed.
The UK Finance Household Review for the period found that this followed the market’s rebound in Q2, with indications of more growth in Q4.
UK Finance said the recovery seen in Q3 was lower than that seen in Q2 after application numbers declined in the second quarter, which was likely due to interest rates starting to rise.
Lending volumes have not fully recovered despite the two consecutive quarters of double-digit annual growth and are still below average levels seen in 2022.
As some lenders continued to reduce new mortgage rates in Q3, resulting in a rise in applications, the organisation said the increase in completions would be sustained for the rest of the year.
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Drop in mortgage arrears
The slight increases in mortgage arrears recorded at the start of the year were reversed in Q3, as these started to decline.
UK Finance recorded a 3% fall in arrears to 106,630 cases in Q3, more than the cumulative increase in numbers seen so far in 2024.
Borrowers’ resilience when keeping up with mortgage payments was attributed to low unemployment, responsible lending rules ensuring payments were affordable, and the forbearance offered by lenders.
UK Finance predicted that arrears would continue to fall in Q4, but noted some borrowers would still be worried about making their mortgage payments.
It said with a modest rise in unemployment expected for this and next year as well as inflation coming back to target, wage growth would ease the pressure on household finances and lead to a reduction in arrears.
Older mortgage accounts struggling with higher costs
Although arrears are falling overall, UK Finance said there was not much improvement among borrowers already in arrears.
It found cases where borrowers were still unable to manage mortgage payments, causing their arrears to worsen, despite “extensive” lender forbearance.
UK Finance said responsible lending rules had protected almost all recent borrowers from arrears, and the majority came from mortgages taken out over 10 years ago.
It found that more than half of the accounts in arrears were from homeowner mortgages taken out between 2005 and 2008, before the global financial crisis (GFC).
The trade body said some of these will have been in arrears for a while, while others were just about managing when interest rates were low.
Its data showed that when interest rates started to rise in late 2021, there was a “rapid increase” in pre-GFC mortgages falling into arrears.
Even as arrears have improved, this cohort of mortgages is still accounting for a rise in borrowers falling behind on payments.
As well as people falling into arrears, higher rates have meant the arrears balance is rising at a faster rate. The typical value of arrears for pre-GFC increased from just under £13,000 in December 2019 to more than £34,000 by the middle of this year. These arrears represented 29% of the total mortgage balance.
UK Finance said lender forbearance was proven to help borrowers, but in a small number of cases, there was “no realistic prospect of the customer repaying the arrears”.
Additionally, a larger share of these pre-GFC mortgages are on an interest-only basis, so borrowers may not benefit from a growth in equity.
Possessions continue to climb
There were 1,700 mortgage possessions in Q3, and while this was flat on the previous quarter, it was 52% higher than last year.
UK Finance said this was primarily due to possession activity resuming after being suppressed during the pandemic.
The number of possessions was still “incredibly low by historic[al] standards”, and the majority relate to older mortgages that have been in arrears for some time.
The flow of new cases was also declining, suggesting there would be fewer people falling into serious shortfalls and ultimately possession.
However, UK Finance said although the overall number of arrears would drop, possessions would be driven by less resilient, older mortgage accounts.
Affordability improves but is still constrained
UK Finance said demand for mortgages seemed to be coming from people who could have borrowed in a higher rate environment but decided to wait, rather than people who were unable to access finance.
It found there was a decline in the proportion of borrowers stretching themselves financially, aligning with the path of lower interest rates.
However, affordability was still “tighter” than it has been for more than 10 years, mostly due to higher house prices.
Although interest rates have fallen, UK Finance said borrowers were still preferring to choose a product transfer over a remortgage, with the share of this activity remaining above 80%.
The easing of rates and affordability pressures could see more borrowers externally remortgage next year, but UK Finance said product transfers would continue to take a higher share of refinance activity for the time being.
