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Lenders warn of drastic drops in mortgage options for buyers

Lower income households and homebuyers could start seeing their mortgage options dwindle as interest rates rise and the cost of living crisis worsens, lenders have warned.

Analysis by banking trade body UK Finance has found that, based on current Bank of England interest rates and inflationary forecasts, homeowners seeking to refinance or get a mortgage to buy a home this year would typically  see a reduction of a little under 11% of the wiggle room in their budgets.

This would leave the average customer with around one quarter of their net income left over after refinancing onto a new deal rate, its Household Finance Review said.


For households in the lowest income brackets, UK Finance warns, borrowers could face a smaller range of refinancing options as they may fall short of some lenders’ Financial Conduct Authority-mandated income-expenditure affordability tests.

However, most customers will be able to refinance on the open market or refinance onto a new deal with their existing lender, UK Finance said.

The report warns that a household’s “wiggle room” could get tighter if mortgage product rates rise by a further 100 basis points.

It said: “Homeowners looking to refinance this year would see an average reduction of some 14% in their wiggle room, compared to their position when they took out their previous mortgage.

“Again, whilst a significant hit to household finances, this would leave the average borrower with a fifth of their take-home pay as free disposable income. 

“However, with these effects unevenly distributed, those on lower incomes are likely to feel these combined cost pressures much more acutely. 
“Whilst a rise of 100 basis points would still see those borrowers in the highest income brackets with over a third of their disposable income left over after refinancing, many in the lowest income brackets would be left with ten per cent or less.”

In this scenario, UK Finance said, a little under three in 10 borrowers with fixed rates maturing this year would be left with 10% or less disposable income after refinancing if rates rose further.

UK Finance said: “This suggests that a significant proportion of borrowers would find their refinancing options constrained on the open market.

“The same affordability pressures are likely to bear down on effective demand for new house purchase mortgages as we move through this year and beyond, whilst inflation outpaces wage growth.”

The report added that house purchase activity looks to have returned to pre-pandemic norms for now but warned of headwinds from cost-of-living pressures, which could hit demand.

Eric Leenders, managing director of personal Finance at UK Finance, said: “Household spending was stable in the spring, with increased personal loan borrowing. We understand that some consumers are making larger purchases earlier than planned to stay ahead of inflation.

“As we head into the autumn, the pressure on household finances will increase and we anticipate a drop in consumer spending and house-buying activity.”


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