Demand for new house purchase mortgages will weaken in 2023 and 2024 as cost of living increases and the rising rate environment puts pressure on affordability.

In UK Finance’s Mortgage Market Forecast, the association said mortgage lending trends had returned to normal in 2022 and mirrored activity seen just before the pandemic. 

The number of fixed rate mortgages maturing will rise next year, UK Finance said, which will support refinance demand. However, affordability will also impact those on lower incomes, so product transfers may be the preferred option for a number of borrowers. 

Simon Webb, managing director of capital markets and finance at LiveMore, said: “If people bought in 2021 during the stamp duty holiday and paid top price for their home, in some cases it may have gone down in value.   

“House price growth is now falling and many commentators are predicting a drop in prices. If borrowers took out two-year fixed rates, they will need to remortgage this year and may find they can’t pass affordability tests and their only option is a product transfer.” 

UK Finance said strong employment levels despite the recession will allow most people to keep up with mortgage repayments, and any resulting arrears will not be seen until the latter part of 2023. 

Transaction levels to fall 

UK Finance has predicted that the number of residential transactions will decline by 21 per cent to around one million, down from 1.3 million. This will then slip to 991,000 transactions in 2024. This will be below levels seen since 2013. 

Gross mortgage lending will fall by 15 per cent from £322bn to £275bn, then fall further to £253bn the following year. Comparatively, gross mortgage lending reached £260bn in 2017, then £269bn in 2018 and 2019, suggesting a relative return to normal levels of lending. 

For those buying a home, this will fall from £171bn this year to £131bn and £122bn in 2023 and 2024 respectively. Buy-to-let lending will fall from £18bn this year to £13bn in 2023 and £11bn the year after. 

Gross lending for remortgaging homeowners will rise to £89bn next year from £82bn this year, then fall back to £81bn in 2024. For buy-to-let borrowers who are remortgaging, gross lending will reach £30bn in 2023, down from £38bn this year. This will decline to £28bn in 2024. 

Marcus Wright, managing director at Bolton Business Finance, said the decline in lending to landlords was in line with what his firm was already seeing. 

He added: “Many buy-to-let mortgage applications are not progressing further, once they see how much the interest rate will be. Fixed buy-to-let rates are in many cases double what they were 12 months ago, making many property investments not viable. This will no doubt feed into house prices, along with reduced household purchases.” 

Product transfer activity to strengthen 

Product transfer lending will generate £212bn in gross lending next year, a rise on this year’s £197bn. In 2024, this will amount to £193bn. 

Arrears where borrowers are behind on payments by at least 2.5 per cent of the overall mortgage balance will increase from 80,100 this year to 98,500 in 2023. This will rise further to 110,300 in 2024.  

The number of properties which are taken into possession will rise from 4,100 to 7,300 in 2023, then go up to 9,700 in 2024. UK Finance’s Household Finance Review published last week suggested that many of these would be historical cases. 

James Tatch, principal, data and research at UK Finance, said the mortgage market was expected to enter a period of “relative weakness”. 

He added: “The pressures being seen on household finances could mean that some customers have fewer options. However, there is wide availability of product transfers – we would encourage customers to speak to a whole of market mortgage adviser to discuss the options best suited to their circumstances.  

“As always, any customers who find themselves in difficulty should speak to their lender at an early stage, as the industry stands ready to help with a range of forbearance options that can be tailored to best suit individual customers’ circumstances.” 

An opportunity for brokers 

Some brokers noted that a downturn in the mortgage market will give brokers a chance to reposition themselves. 

Gary Boakes, director at Verve Financial, said it would be necessary for borrowers to speak with brokers amid tightening affordability measures. 

He added: “It is going to be so important that customers engage with a mortgage broker as early as they can so they can take advantage of any rate changes to ensure they have the best deal possible.” 

John Phillips, national operations director at Just Mortgages, said there was a “certain amount of pessimism” in the report and said 2023 will be a time for brokers to be proactive. 

He added: “Mortgage brokers have dealt with far worse economic environments and come out the other side. Brokers are in a very privileged position to be able to help people buy or keep their homes and good products still exist and, let’s remember, lenders still want to lend. 

“Diversification will be the watch word for brokers in 2023 and they should look to become proactive in all lending sectors even those they have not targeted previously such as equity release, commercial and overseas mortgages. There is also an untapped income for many brokers by simply ensuring that their existing and new clients have the appropriate protection needs met. 

Phillips said there were also benefits from referring clients with wider financial circumstances to other professionals such as a pensions or wealth advisers. 

“2023 can be a year of opportunity for brokers; they just need to seize it,” he added.