Grinch! No Christmas cheer in Q3 UK Finance sentiment survey

There’s been a sharp decline in household financial confidence in the UK according to the latest UK Finance sentiment survey.

The Q3 Household Finance Survey says a contraction in house purchase lending continued, with cost-of-living pressures and higher interest rates presenting a significant barrier to mortgage affordability. Indications are that Q4 will show a further contraction. 

The survey says mortgage lending is weak in almost every segment of the market, but this can be seen most acutely in the tighter end of affordability, in particular lending at higher LTVs and income multiples. 

Customers with lower incomes are currently putting down deposits equal to twice their annual income in order to meet affordability requirements. 

Mortgage refinancing remained strong in Q3. Within this, the same affordability pressures, as well as competitive retention deals, drove yet more customers to take a Product Transfer with their existing lender. 

Households continued to run down savings to cover increased monthly bills. At this stage, however, there is no sign of increased reliance on overdrafts or credit cards to cover any shortfalls in budgets. 

Arrears saw an expected larger rise in Q3, with signs that more increases lie ahead. Cost and rate pressures have pushed more customers into a payment shortfall and increased the pressure on those already in arrears. However, arrears cases continue to be mainly older mortgages, with very few mortgages underwritten since FCA-mandated stress tests came into force now entering arrears. 

Possessions fell slightly and remain at historically very low levels, as the industry works through the historic backlog of cases. No possessions related to arrears newly arising amidst cost-of-living and interest rate pressures are expected until the end of 2024 at the earliest. 

Retail sales saw a larger than expected contraction at the end of Q3 but card spending held up, with ongoing strength in the travel sector. 

Reaction from brokers has been understandably sober.

Samuel Mather-Holgate, an IFA at Mather and Murray Financial, says: "This report is a stark warning about the future of the economy, with almost every indicating factor showing signs of deterioration. It's almost certain that a recession is looking, we just don't know how long and sharp it will be. The report can be summarised as, households that have savings are running them down, and those that don't are getting into debt. This is an unsustainable state of affairs that needs addressing now, not in six months' time after a General Election."

Stephen Perkins, managing director at Yellow Brick Mortgages, comments: "No surprises here at all. The cost of living crisis is nowhere near finished yet as many homeowners still have to add a potentially significant mortgage payment hike to their already strained finances. Many households are getting by on credit and raiding their savings, which is only a short-term fix. We need more mortgage rate cuts to steady the boat before it capsizes."

And Ranald Mitchell, a director at Charwin Private Clients, adds: “People looking to buy with lower deposits are struggling to meet lender affordability requirements. With rates dropping and lenders focused on helping this end of the market, 2024 may look a little brighter for people looking to get onto the ladder. The rise in retention is no surprise either. Many mortgage holders need to simply accept what their lenders are offering, as switching elsewhere is no more attractive and even if they did, they may again fail affordability to do so. With cost of living pressures, savings erosion and many households facing a sharp increase in mortgage costs, the full effects of the problem unfolding in the economy have yet to be seen. This report is a massive red flag."