Notably, affordability issues for potential house buyers have increased due to a combination of tightened budgets and mounting financing costs, leading to an escalated number of customers defaulting on their mortgage payments. Although some households are depleting their savings under these financial strains, the report noted that spending and use of unsecured credit at the onset of 2023 generally followed expected seasonal trends.

Mortgage lending in the first quarter was reported at its lowest since Spring 2020, with lending to both first-time buyers (FTB) and home movers being the lowest since the market was largely shut down during the initial Covid-19 lockdown. A drop in mortgage activity was anticipated, given the intensifying affordability constraints due to rising living costs and interest rates.

Despite these constraints, existing mortgage customers near the end of their fixed-rate deals have not yet experienced restrictions on their refinancing options. The financial pressures, however, are beginning to affect the customers’ willingness and capacity to borrow more against their homes.

Concerns are being raised over the increase in mortgage arrears during the first quarter, even though the rise is from a relatively low base. UK Finance’s analysis suggests several factors driving arrears, varying according to different household circumstances. Therefore, lenders are urged to maintain a tailored approach to assist borrowers experiencing financial hardship.

Furthermore, for the first time in over a decade, there was a year-on-year contraction in the level of household savings. The overall value of deposits in instant access accounts experienced a four per cent decrease, falling to £867 billion from £905bn in 2022. It is expected that the levels of savings will continue to decline until the current cost pressures subside.

Meanwhile, consumer spending has remained relatively stable despite the financial strains. Consumer spending usually experiences a slump after the festive season, and the trend was observed at the start of 2023 as well. However, a significant increase in travel spending managed to offset the dip.

Eric Leenders, managing director of personal finance at UK Finance, said: “Cost of living pressures and higher interest rates weighed on households in Q1. We saw the first year-on-year drop in savings levels in 15 years as people dipped into their savings pots to pay their bills and support usual spending.

“Meanwhile, mortgage lending dropped significantly at the start of the year, although some borrowers are still stretching affordability with longer term mortgages. More recently, uncertainty around the inflation outlook has led to another bout of elevated volatility in swap markets, leading to some repricing by lenders.

“While this persists, we expect near term mortgage market activity to remain relatively fragile. Borrowers coming to the end of their fixed-rate deal are encouraged to seek advice from a whole-of-market broker.

“As always, it’s crucial that customers worried about their finances speak to their lender as soon as possible, so that they can discuss the options available for help.”