The number of households with a mortgage is continuing to decline, having reached a peak in 2007 just before the global financial crisis took hold. A return to this level is unlikely in the short to medium-term.
The number of new mortgages has fallen as people remain in the private rented sector for longer. Meanwhile older homeowners are paying off their debt at a faster rate than members of the younger generation are taking out new loans, particularly as rates have risen.
As a result, over the past 17 years, there has been a 1.2 million drop in the number of outstanding mortgages. According to UK Finance data, there are currently 10.7 million outstanding mortgages in the UK, equating to £31.4bn worth of lending.
As our research shows, over the past 12 months 758,000 mortgages were paid off. This was 144,000 more than were taken out. Or to put it another way, during the first quarter of this year, for every 10 mortgages taken out, 11 were paid off.
Aspiring first-time buyers are being held back not only by higher property prices, but also by the tougher stress tests imposed by lenders in the wake of the last financial crash. These stress tests aim to ensure that mortgage applicants can meet their repayments if interest rates rise, and they have been largely instrumental in keeping arrears down over the past two years.
But, over the course of the past decade, the tests have also made it much more difficult to climb onto the housing ladder. Higher rents mean that it can be a struggle to save a deposit large enough to satisfy the stress-testing criteria. More recently, as mortgage rates have risen, the amount of money households need to earn to pass these tests has moved upwards too.
" Over the past 12 months, 758,000 mortgages were paid off… 144,000 more than were taken out."
In many cases, would-be first-time buyers with small deposits are now facing rents lower than the repayments they would have been making on a mortgage – if they had been able to qualify for a loan.
For much of the past decade, low interest rates meant that few borrowers prioritised paying off significant chunks of their mortgage debt. Often, they could earn a higher return from savings and investments than the rate they were paying on their mortgage.
But, as mortgage rates have headed upwards, many of those borrowers with the means to do so have cleared all or part of their mortgage. The number of people paying off their mortgage has exceeded the number that were taking out a new loan in seven of the past eight quarters.
Looking further back, this was also the case in 21 of the past 30 quarters. This pattern is unlikely to change in the short-term as higher rates incentivise households to pay down debt and limit the amount of new loans being taken out.
At present, more mortgages are being paid off before the end of their term. But, in the medium to longer-term, extended mortgage terms and more expensive house prices will curb the ability of Gen X and older Millennial borrowers to break off mortgage debt.