Some mortgaged households are expected to see their disposable income fall by 3% this year

Use of overdrafts increased in the first quarter but remains below pre-pandemic norms, according to the Household Finance Review (Joe Giddens/PA) (PA Archive)

According to trade association UK Finance, the average household who took out a mortgage in 2021 faces a 3% reduction this year in the amount of their disposable income after mortgage, credit commitments and living expenses.

Compression in the cost of living will be felt particularly acutely in lower income brackets, which have about half the disposable income of those in higher brackets, even before cost of living pressures are taken into account. , he added.

He revealed that most borrowers from all income brackets would still qualify for the same mortgage amount now as they did last year.

However, some borrowers would not be eligible for the loan amount granted last year due to the new additional costs, which could lead to a slowdown in demand for mortgages this year, UK Finance said.

While mortgage activity is expected to be strong throughout this year, much of it will be driven by customers coming to the end of their fixed rate agreements and looking to switch to a new rate, he said. added.

Our analysis shows that this year there will be a 3% drop in the disposable income of the average mortgage household, which could lead to lower spending and borrowing

Eric Leenders, UK Finance

This contrasts with previous years, when a significant element of remortgage activity was to borrow substantial additional sums, in many cases to fund other real estate purchases.

Credit card spending and personal borrowing both increased in the first quarter of 2022, returning to pre-Covid trends, the report adds.

After sharp declines during the pandemic, outstanding credit card balances remained broadly static in the quarter at £56bn.

There were £4.7bn of new personal loans from major banks in the first quarter.

Savings growth has slowed, following substantial increases in 2020 and 2021. A total of £1.1 trillion is held in savings accounts, 84% of which in instant access accounts.

The use of overdrafts increased during the first quarter, but remains below pre-pandemic norms. The total overdraft of around £5.5bn is around 15% lower than the amount seen in 2019.

Although many banks have started to take steps to support their most vulnerable customers, they must also focus on communicating their empathy for consumers affected by this crisis.

Krishnapriya Banerjee, Accenture

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 started to rise, although this did not happen. not translate into lower expenditure. or a mortgage loan.

“However, we know that some people, especially those on low incomes, will already feel the pressure.

“There are significant additional pressures on household finances in the second quarter, particularly due to rising energy prices and tax changes.

“Our analysis shows that this year there will be a 3% drop in disposable income for the average mortgage household, which could lead to more moderate spending and borrowing.

“Any customers who are concerned about meeting their loan repayments should quickly speak to their lender to discuss the tailored assistance available to them. Lenders won’t put customers on a plan they can’t afford.

The household finance review was carried out in collaboration with Accenture.

Krishnapriya Banerjee, managing director of Accenture’s UK banking practice, said: “While the first quarter painted a fairly stable picture for UK household finances, potential further interest rate hikes and surges energy prices mean that the full effects of the soaring cost of living have yet to bite into household budgets.

“While many banks have started making arrangements to support their most vulnerable customers, they must also focus on communicating their empathy for consumers affected by this crisis.

“Banks need to strike the right balance between digital service delivery and human-centric banking to help customers navigate this challenging situation.”