Lenders warn of drastic drop in mortgage options for…

Low-income households and homebuyers could start to see their mortgage options dwindle as interest rates rise and the cost of living crisis deepens, lenders have warned.

Analysis by banking body UK Finance found that, based on current Bank of England interest rates and inflation forecasts, homeowners looking to refinance or secure a mortgage to buy a home this year would typically see a reduction of just under 11% of wiggle room in their budgets.

That would leave the average customer about a quarter of their net income remaining after refinancing at a new transaction rate, according to its Household Finance Review.

For households in the lowest income brackets, UK Finance warns, borrowers may face a narrower range of refinancing options as they may not meet some income and expense affordability criteria. lenders.

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

The report warns that a household’s “wiggle room” could squeeze if mortgage product rates rise another 100 basis points.

He said: “Homeowners looking to refinance this year would see an average reduction of around 14 per cent in their headroom, compared to where they were when they took out their previous mortgage.

“Again, although this is a significant impact on household finances, it would leave the average borrower with a fifth of their take home pay as free disposable income.

“However, with these unevenly distributed effects, low-income people are likely to feel these combined cost pressures much more acutely.
“While a 100 basis point increase would still see borrowers in the highest income brackets with more than a third of their disposable income after refinancing, many in the lowest income brackets would end up with ten percent or less.”

In this scenario, UK Finance said, just under three in 10 borrowers with fixed rates maturing this year would end up with 10% or less of disposable income after refinancing if rates rose further.

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

“The same affordability pressures are likely to weigh on effective demand for new mortgages to home purchases this year and beyond as inflation outpaces wage growth.”

The report adds that home buying activity appears to be back to pre-pandemic norms for the time being, but warns of headwinds from cost of living pressures, which could affect demand.

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

“As we head into the fall, pressure on household finances will increase and we expect lower consumer spending and home buying activity.”

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