A softening in the mortgage market is predicted for next year marking a return to pre-pandemic norms, with the ongoing cost of living pressures and rising interest rates set to reduce demand for house purchases between 2023 - 2024.
The forecast comes from UK Finance, which anticipates that the number of property transactions will fall 21% next year (from around 1.2 million in 2022 to 1 million in 2023), with the value of lending to homeowners dropping 23%, and lending to landlords falling 27%.
Yet despite the anticipated fall in activity, the UK has a strong mortgage and housing market which will remain competitive.
At the same time, strong demand for refinancing is predicted, as around 1.8 million fixed-rate mortgage deals are scheduled to end in 2023.
Affordability pressures facing borrowers will mean some borrowers, particularly amongst lower income brackets, may find re-mortgaging options more limited on the open market. However, with the widespread availability of internal product transfers, refinancing overall is expected to be strong through next year. UK Finance forecast around £212 billion of product transfers to take place next year, compared with an estimated £197 billion in 2022.
Arrears to rise gradually from historic lows
With forecasts for unemployment showing a relatively small increase, the vast majority of borrowers will be able to maintain their mortgage payments.
However, any rise in unemployment, coupled with cost of living pressures and interest rate increases, will put further pressure on some households. UK Finance believes that this pressure will begin to show in rising mortgage arrears from early 2023, increasing through the year and into 2024. The number of households in arrears is forecast to reach 98,500 next year, representing around one per cent of outstanding mortgages. By historic standards, these increases arrears figures do remain low.
Possession numbers rose modestly during 2022 as lenders and the courts worked through the backlog of cases that had built up due to the pandemic-induced possessions moratoriums. As historic cases make their way through the courts the number of possession cases has risen and this is expected to continue slowly through the next two years as the backlog is cleared. However, as noted above with arrears the increase in the number of properties being repossessed remains low compared to the years prior to the Covid-19 pandemic.
James Tatch, Principal, Data and Research at UK Finance, said: "As we look ahead, the mortgage market is expected to enter a period of relative weakness from next year as house prices, the cost-of-living and interest rate pressures put a brake on new demand.
“The high level of activity during the 2021 Stamp Duty holiday means that a large number of borrowers are due to refinance next year, pushing up the expected value of refinancing in 2023. The pressures being seen on household finances could mean that some customers have fewer options. However, there is a 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."