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Published: 25 May 2017 | Author: Mohammad Jamei

  • Transactions continue to be driven by first-time buyers, as all other parts of the market remain weaker than this time last year
  • Our estimate of gross mortgage lending for April is £18.4 billion. Accounting for seasonal factors, this figure is higher than average lending over the past year
  • Remortgage activity and first-time buyers continue to drive lending growth, as buy-to-let and home mover numbers remain subdued
  • The number of first-time buyers over the last 12 months has overtaken the number of home movers for the first time since 1996

UK economy

The economy is estimated to have grown 0.3% in the first three months of 2017, slower than forecasted earlier in the year.

The jobs market powers on though, with the unemployment rate now at its lowest since 1975, at 4.6%.

But there’s a catch. Rising inflation and weak wage growth means that nearly two and a half years of real wage growth has come to an end. March data showed that real wages have begun to fall, as earnings show little response to the tightening in the labour market.

With the inflation rate at 2.7% in April, and expected to rise further through this year, a sustained period of falling real wages looks very likely. This will bear down on consumer spending.

Given that wage growth remains weak, even in the face of rising inflation, the Bank of England’s monetary policy committee (MPC) continued to signal that it would be willing to tolerate a degree of above target inflation.

Housing and mortgage markets

The housing market appears to be, for want of a better phrase, moving sideways. In the words of the Bank of England’s Agents’ survey, activity ‘had remained muted’.

On most measures, the market has been flat for the past six months. Compared to the same time a year ago, it’s down slightly.

The number of transactions have been steady recently, averaging 100,000 per month. This is likely to continue, as house purchase approvals – a leading indicator of transactions – have also been steady, averaging 67,500 for the past six months.

The MPC updated its forecasts in its May Inflation Report, but left expectations for house purchase approvals at 71,000 per month for the rest of the year. We remain less optimistic, as house purchase activity is being driven predominantly by first-time buyers.

In fact, since the stamp duty change for second properties last April, first-time buyer numbers are the only component of transactions that has grown consistently.

This is in contrast to late 2015 and early 2016 where all components of transactions were growing.

Chart 1: Annual growth rate of components of property transactions

chart 1 mc

Source: HMRC, CML, CML calculations

Download data

Yet, lending had remained stable since last April, with an average of £20 billion a month borrowed.

Our estimate of lending in April could signal a breakout from that average, as it comes in at £21.7 billion on a seasonally adjusted basis. On an unadjusted basis, lending was £18.4 billion.

While we won’t have a breakdown for April lending for a few weeks to come, the drivers of lending are likely to be first-time buyers and remortgage customers, as they have buoyed lending over the last year.

We expect this trend to continue over the coming months.

Attractive mortgage rates are no doubt encouraging borrowers to remortgage. For example, average mortgage rates on lower loan-to-value (LTV) mortgages continue to fall. Fixed rate mortgage on offer at 75% LTV are currently at all time lows at two, three and five year lengths.

In contrast, higher LTV mortgage rates have edged up since the start of the year. This is likely as a result of the closure of the Help to Buy: Mortgage Guarantee scheme at the end of 2016.

This will impact first-time buyers more, as they typically borrow at higher LTVs. However, there are a number of factors helping first-time buyers, including the various government housing schemes which are primarily aimed at them and have helped boost their numbers since early 2013. Over the last 12 months, the number of first-time buyers reached 345,000, the highest since the start of 2008.

Home movers are having less luck. Their numbers have been subdued for some time now as they have benefitted far less from government help, and have largely been left to fend for themselves. In the 12 months to March, there were 344,000 movers. This is the first time since 1996 that first-time buyer numbers have exceeded movers. We have commissioned research to look into the reasons for this low housing market turnover.

A low number of home movers has wider housing market effects, one of which is that fewer properties come up for sale. On average, nine in 10 properties on the market at any time are existing properties, not new ones. The Royal Institution of Chartered Surveyors survey noted “no evidence of more stock coming to the market” this month.

This supply/demand imbalance will continue to underpin house price values, even as the rate of price rises slows.

On buy-to-let, we now have 12 months worth of data post-stamp duty change on second properties. We see that the number of loans for buy-to-let house purchase has halved over this period. Remortgage activity on the other hand is virtually unchanged.

This means house purchase activity in the buy-to-let sector now accounts for just under a third of all buy-to-let lending, whereas before the change it accounted for over 40%. The flipside is that remortgaging now accounts for two-thirds of lending, up from just over half.