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The average household that took out a mortgage in 2021 faces a 3% reduction this year in the amount of disposable income it has left over after home loan, credit commitments and living costs, according to trade association UK Finance.
The cost-of-living squeeze will be felt particularly acutely in lower-income brackets, which have around half the spare income of those in higher brackets, even before cost-of-living pressures are factored in, it added.
It found most borrowers across all income brackets would still qualify for the same sized mortgage now as they did last year.
However, there will be some borrowers who would not qualify for the size of loan granted last year due to the new additional costs, which may result in a softening of demand for mortgages this year, UK Finance said.
While mortgage activity is expected to be strong through this year, this will largely be driven by customers coming to the end of their fixed-rate deals and looking to switch to a new rate, it added.
This contrasts with previous years, when a significant element of re-mortgaging activity involved borrowing substantial sums of additional money, in many cases to fund further property purchases.
Credit card spending and personal loan borrowing both increased in the first quarter of 2022, returning to pre-Covid trends, the report added.
Following sharp falls during the pandemic, outstanding credit card balances were broadly static over the quarter at £56 billion.
There were £4.7 billion-worth of new personal loans made by high street banks in the first quarter.
The growth in savings eased, following substantial rises through 2020 and 2021. In total, there is £1.1 trillion held in savings accounts, of which 84% is in instant access accounts.
Overdraft usage rose during the first quarter but remains below pre-pandemic norms. Total overdraft debt of around £5.5 billion is around 15% below the amount seen in 2019.
Eric Leenders, managing director of personal finance at UK Finance, said: “During the first quarter of 2022 we saw the spread of the Omicron variant of Covid and consumer prices beginning to rise, although this did not translate to any drop-off in spending or mortgage borrowing.
“However, we know that some people, particularly those on lower incomes, will already be feeling the strain.
“There are significant additional pressures on household finances in the second quarter, most notably from energy price rises and tax changes.
“Our analysis shows that this year there will be a 3% fall in disposable incomes for the average mortgaged household, which may result in more subdued spending and borrowing.
“Any customers worried about meeting their loan payments should speak to their lender early to discuss the tailored support available to them. Lenders won’t put customers on a plan that they can’t afford.”
The household finance review was produced in collaboration with Accenture.
Krishnapriya Banerjee, managing director in Accenture’s UK banking practice, said: “While the first quarter painted a fairly stable picture of the UK’s household finances, further potential interest rate hikes and energy price booms mean the full effects of the soaring cost of living have yet to bite into household budgets.
“Although many banks have started making provisions to support their most vulnerable customers, they also need to focus on communicating their empathy for consumers affected by this crisis.
“Banks need to strike the perfect balance of delivering digital services and human-centric banking to help customers navigate this challenging situation.”