UK Finance’s third quarter Household Finance Review shows mortgage lending returning to growth after a muted second quarter in which many buyers brought forward purchases ahead of April’s stamp duty changes.
Refinancing also rose sharply as more households moved off fixed-rate deals, though affordability pressures remain pronounced across much of the market.
Lending for home purchase strengthened through Q3 following the stop-start pattern created by the spring stamp duty reforms.
Activity has now returned to the broadly stable levels last seen in 2022, despite wider cost-of-living pressures and elevated monthly payment burdens. Early indicators suggest momentum continued into October before easing slightly in November.
AFFORDABILITY AND MARKET ACCESS
Refinancing volumes also moved higher. There were 557,000 loans advanced in Q3, an increase of 48% on the same period of 2024.
Most of this was driven by internal product transfers, with customers opting for the speed and familiarity of staying with their existing lender as their fixed-rate terms expired.
Affordability remains strained, particularly for first-time buyers who continue to spend around 22% of gross household income on mortgage payments. UK Finance notes this is the highest proportion for nearly two decades.
The FCA’s recent Mortgage Rule Review has reinvigorated debate over access and proportionality. While the framework has clearly helped to keep arrears low, it has also narrowed the pool of borrowers able to secure finance.
EXTENDING MORTGAGE TERMS
Interest-only lending has fallen from more than a quarter of new loans in 2005 to just 1% today.
Lending to self-employed applicants has also contracted, dropping from 15% to under 9% over the same period.
At the same time, more customers are extending mortgage terms or taking on higher loan-to-income borrowing to bridge affordability gaps.
The modest relaxation of the Financial Policy Committee’s loan-to-income cap earlier this year has supported a rise in higher LTI lending to first-time buyers, with 11% more loans completed through Q3 than in the same period last year.
The review suggests there may be scope for carefully calibrated adjustments to widen access for creditworthy but underserved groups, particularly the self-employed.
UK Finance stresses that any such changes would need to maintain the prudential safeguards that have underpinned market resilience in recent years.
HOUSEHOLD SAVINGS
Savings activity continued to increase, though at a slower pace. Deposits in notice accounts and cash ISAs remained more than 10% higher year-on-year as households maintained precautionary saving habits amid uncertainty ahead of the Autumn Budget.
At the end of September, balances stood at £295 billion in notice accounts and £207 billion in cash ISAs, up by 10% and 14% respectively on the previous year.
RETURNING TO GROWTH
Eric Leenders, managing director of personal finance at UK Finance, says: “Mortgage lending returned to growth in the third quarter after a quieter start to the year, while refinancing also increased as more customers rolled off fixed-rate deals.
“Affordability remains tight, but recent regulatory adjustments are helping widen access at the margins, and the FCA’s review raises important questions about how rules could be adapted to support underserved groups such as the self-employed.”
And he adds: “Savings growth has moderated but remains strong by historic standards, with households continuing to build precautionary buffers against an uncertain economic backdrop ahead of the Autumn Budget.”
BALANCING ACT
Mary-Lou Press, President of NAEA Propertymark (National Association of Estate Agents), says: “While mortgage activity has picked up, the market remains finely balanced.
“The return to growth in lending and the sharp rise in refinancing are welcome signs of renewed confidence, but affordability pressures continue to hold many prospective buyers back, particularly first-time buyers, who are now committing the highest share of their income to mortgage payments in nearly twenty years.
“Many agents are still seeing buyers stretch loan terms or rely on higher loan-to-income ratios simply to enter the market; therefore, it would be a welcome step to see regulatory change matched with a long-term plan to increase housing supply and genuinely improve affordability.
“Households continue to save cautiously amid economic uncertainty, reminding us that confidence remains fragile. We hope that policymakers focus on reforms that support accessible and sustainable homeownership.”
