UK Finance Reveals the Impact of Cost of Living Pressures on Mortgaged Households, People are Warned to Take Immediate Actions

The latest Finance Review Report released by the UK Finance (in collaboration with Accenture) details the household spending trends, and that of borrowing, and saving during the first half of the year 2022. The Review further throws light on the possible effect of the cost of living challenges that might be seen on the mortgaged households this year. Keeping in mind the gravity of the situation and increasing household expenses, people are urged to take early action in this regard. 

There’s sad news for average households that availed or borrowed a mortgage in the year 2021. Those who took out the mortgage will have to bear a 3% reduction in the disposable income amount that was left behind after the home mortgage, credit score commitments, and cost of living. The trade association of UK Finance confirms the same. As per reports, the burden of this cost-of-living squeeze will majorly hit the household that falls in lower-income brackets and is not left with enough space income after taking home loans. According to a general estimation, their spare income amounts to half of what households in higher brackets have as their spare income. It is a matter of concern to see this estimation being made even before the cost-of-living pressures are taken into account. 

It is a serious concern for lower-income brackets as their situation has already been made worse due to the Covid-19 pandemic and increasing hike in prices of petrol and other commodities of day-to-day life. The Report further describes how mortgage borrowers across all income brackets would be able eligible for same-sized loans, as was the case in the year 2021. But there would be some people who would not be able to qualify for the same size of loan or mortgage that was accorded last year because of the latest additional costs and expenses. UK Finance also added that it would further show a decline in the demand for loans this year, i.e. 2022. 

It is also predicted that the flow of mortgage activity will depend on the customers who are willing to shift to a new rate as opposed to their fixed-rate, “rigid” deals. This will be in dire contrast with the previous years that observed a hike in property purchases. People were seen to borrow huge sums of money to indulge in re-mortgaging activities. 

When it comes to credit card spending and taking personal loans, things are moving to the pre-pandemic times. Both credit card expenditures and borrowing of personal loans went up in the first half of this year. Whereas during the Covid crisis, a static trend was seen in the balance of credit cards. As per data, new personal loans worth £4.7 billion are made in the first quarter by the high street banks. On analysis, it shows a tremendous increase in the savings of people compared to the years 2020 and 2021. The money is held by people in both their savings accounts and instant access accounts. On estimation, about  £1.1 trillion is seen to be held in savings accounts, out of which 84% is in instant access accounts.

A hike is also seen in overdraft usage in the first half of 2022. However, it is still less than the norms of pre-pandemic. In contrast to 2019, the total debt of overdrafts of approximately £5.5 billion is around 15% low. The UK Finance managing director, Eric Leenders, added that although the first half of 2022 witnessed the rise of the novel Omicron variant of Coronavirus and the rises in consumer prices, there has been no reduction in mortgage borrowing or expenditures. However, he did not deny the pressure of the squeeze in the cost of living that people from lower-income backgrounds would have to face, the ones who are already adversely impacted by the Pandemic. 

The Report also revealed how the second half of 2020 will create an additional financial burden on households because of the rise in energy prices and changes in tax. The analysis further made the finance persons predict a fall of 3% in the disposable income for those belonging to average mortgaged households. As a result, there would be a significant decline in the activities involving money spending and borrowing. 

It is advised to the customers to ask for additional support from their lenders in case they are tensed about repaying their loans. Lenders are also cautioned not to make customers buy or invest in plans that are unaffordable.

In this regard, we also see Krishnapriya Banerjee, Accenture UK banking practice’s managing director, giving her views. According to her, the first half of 2022 has still given a balanced picture of the UK household finances. The challenge is to bear the finances in the second half of the year as there will be a rise in energy prices and rate of interest. She further added how banks need to be empathetic with their customers, especially the ones who are still facing the strains of the Covid-19 crisis. There is also a need for banks to deliver both digital and in-person services to help customers get through this tough situation. Although the picture seems bleak, the words of the managing director are optimistic and hopeful. As long as banks and customers are empathetic toward each other, the second half of 2022 will not be unbearable in terms of finances. 

It is also suggested that the customers act judiciously on their household budget to fight the challenges they might face in the second quarter. Sitting back relaxed can prove to be strenuous later on, so they are asked to be prepared in advance and take immediate steps. The sooner they will realise the gravity of the situation, the better prepared they will be to cope with the consequences of the fall in the cost of living.