The cost of living crisis reduced the financial room available to many UK mortgage borrowers during 2023. UK inflation reached 8.7% in April 2023. Food prices, household bills and borrowing costs remained under significant pressure.

At the same time, Bank Rate reached 4.5%. This increased costs for variable-rate borrowers and many homeowners approaching a new mortgage deal.

Higher expenditure could affect lender affordability calculations, even where a household’s income had not fallen.

Borrowers facing payment pressure should review their budget, credit commitments and mortgage arrangements before missing a payment.

What did this study examine?

This study examines the relationship between living costs and mortgage affordability during the first half of 2023.

It focuses on information available by 2 June 2023. It should therefore be read as a study of that period.

The study considers three connected pressures:

• Higher prices for essential goods and services.
• Rising mortgage interest rates.
• Reduced household capacity to absorb financial changes.

A mortgage may last for decades. However, its affordability is tested within the household budget of the present.

That principle became particularly important during 2023.

What was happening to household costs in 2023?

The UK Consumer Prices Index rose by 8.7% during the year to April 2023.

This was lower than the 10.1% rate recorded during March. However, prices were still rising much faster than normal.

The Office for National Statistics inflation report showed continued pressure across several household spending categories.

Food and non-alcoholic drink prices were among the largest sources of pressure.

These increases mattered because food, heating, transport and housing are difficult to remove from a household budget.

Discretionary spending can often be reduced. Essential spending usually offers much less flexibility.

Therefore, a lower headline inflation rate did not mean that household costs had returned to previous levels.

Inflation measures how quickly prices are changing. It does not show that earlier price increases have been reversed.

The 2023 mortgage affordability picture

The table does not mean every household experienced the same pressure.

Income, savings, mortgage size, family structure and regional costs all affected the result.

However, the combined direction was clear. Many households faced higher essential spending and higher borrowing costs together.

Why were mortgage rates increasing?

The Bank of England uses Bank Rate to help control inflation.

On 11 May 2023, the Monetary Policy Committee increased Bank Rate from 4.25% to 4.5%.

The May 2023 Bank Rate decision explained that inflation remained well above the 2% target.

Bank Rate does not determine every mortgage rate directly.

Fixed mortgage pricing also reflects swap rates, lender funding costs, competition, loan risk and product demand.

However, a rising Bank Rate can affect:

• Tracker mortgage payments.
• Discounted variable mortgages.
• Standard variable rates.
• New fixed-rate pricing.
• Lender affordability stress tests.

Borrowers approaching the end of a fixed rate faced a particular challenge.

Their existing rate may have been agreed when market rates were considerably lower.

The relevant comparison was therefore not simply between one new lender and another.

It was often between the existing fixed payment and a higher payment across the available market.

Homeowners approaching a deal change could review the remortgage process and available checks before their existing rate ended.

How did higher living costs affect mortgage affordability?

Mortgage affordability is not based on income alone.

Lenders normally assess the relationship between income, expenditure, debts and the proposed mortgage commitment.

The assessment may include:

• Basic salary and regular additional income.
• Employment status and income history.
• Loans, credit cards and finance agreements.
• Childcare and maintenance commitments.
• Council Tax and household bills.
• Travel and commuting costs.
• Dependants within the household.
• Mortgage term and repayment method.
• The proposed interest rate.
• Possible future rate changes.

When essential spending increases, less disposable income remains for mortgage payments.

This can affect an application even where the applicant earns the same salary as before.

A household may therefore feel poorer without experiencing a reduction in nominal income.

That distinction is central to understanding the 2023 affordability problem.

Borrowers considering a new application could use the residential mortgage affordability calculator for an initial estimate.

A calculator cannot provide a lending decision. Each lender applies its own criteria and expenditure assumptions.

Did all borrowers experience the same pressure?

No. The effect depended heavily on the borrower’s mortgage arrangement.

Fixed-rate borrowers

Borrowers within a fixed period usually retained the same contractual payment until that period ended.

However, households nearing expiry could face a considerable payment change when selecting a new deal.

Tracker-rate borrowers

Tracker mortgages normally move in relation to Bank Rate or another stated reference rate.

Several Bank Rate increases could therefore produce repeated payment changes.

Standard variable-rate borrowers

Standard variable rates are set by individual lenders.

They can change after Bank Rate movements, although the relationship is not always automatic.

First-time buyers

First-time buyers faced higher mortgage pricing while also managing rent, deposits and increased household costs.

Higher rates could reduce the amount supported by a lender’s affordability assessment.

Landlords

Landlords faced higher finance costs, maintenance expenses and regulatory obligations.

Some also faced weaker interest coverage calculations when applying for buy-to-let finance.

Older homeowners

Older borrowers could experience pressure from fixed retirement income, higher bills and limited borrowing terms.

Homeowners considering later-life borrowing should examine repayment costs, compound interest and inheritance effects carefully.

Connect Lifetime explains how later-life mortgages work for eligible older homeowners.

Could increased use of credit affect a mortgage application?

Credit can help households manage short-term timing differences. However, repeated borrowing may change the mortgage assessment.

Lenders may examine:

• Outstanding credit balances.
• Monthly contractual repayments.
• Credit utilisation.
• Recent applications for credit.
• Overdraft use.
• Missed or late payments.
• Defaults or County Court Judgments.
• Whether existing commitments appear sustainable.

Using a credit card does not automatically prevent someone from obtaining a mortgage.

The reason for borrowing, the balance level, and the repayment record all matter.

However, higher monthly debt commitments reduce the income available for a proposed mortgage.

Borrowers should check their credit records before applying. Errors should be raised with the relevant credit reference agency.

Those with previous payment problems can read how lenders may assess an adverse-credit mortgage application.

What happens when household bills cause missed payments?

A missed payment can have wider consequences than the immediate arrears.

The lender or provider may report the missed payment to credit reference agencies.

That information can affect future applications for:

• Mortgages.
• Remortgages.
• Loans.
• Credit cards.
• Mobile contracts.
• Other regulated credit.

Different lenders treat recent payment problems differently.

They may consider:

• The type of missed payment.
• The amount involved.
• How recently did it occur?
• Whether the account is now up to date.
• The reason for the problem.
• The wider credit history.
• Current affordability.

Borrowers should not wait for a missed mortgage payment before seeking help.

Speaking to the lender does not automatically produce a particular outcome. However, it allows the lender to assess available support.

Should unsecured debts be moved onto a mortgage?

Some homeowners consider using a remortgage or secured loan to repay unsecured borrowing.

This can reduce the monthly payment in some cases. However, a lower payment does not always mean a lower total cost.

Extending short-term debt across a long mortgage term may increase the total interest paid.

It also converts unsecured debt into borrowing secured against the home.

Before proceeding, borrowers should compare:

• The new interest rate.
• The repayment period.
• Arrangement and legal fees.
• Early repayment charges.
• The total amount repayable.
• The effect on available equity.
• The risk of future payment increases.

The remortgage debt consolidation guide explains the checks required before securing existing debts against a property.

Debt consolidation is not suitable for every borrower.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it.

What practical steps could borrowers take?

Review the mortgage end date

Check when the current fixed, tracker or discounted period ends.

Also check any early repayment charge and the period during which a new product can be reserved.

Build a complete household budget

Include annual and irregular costs rather than only monthly direct debits.

Insurance renewals, vehicle repairs and school costs can materially change the available budget.

Check existing credit commitments

Record every outstanding balance, interest rate and monthly payment.

Avoid making several credit applications before a mortgage application unless necessary.

Review the mortgage term carefully

A longer term may reduce monthly payments. However, it can increase the total interest paid.

The term should also remain appropriate for the borrower’s age and retirement plans.

Consider financial protection

Living-cost pressure can become more serious when illness, death or lost income affects the household.

Suitable protection may help eligible households manage mortgage commitments after a covered event.

The mortgage protection and life insurance guide explains the main forms of cover.

Policy terms, exclusions, eligibility and costs must be reviewed before applying.

Ask for help before arrears develop

Early contact may provide more time to examine the available choices.

Borrowers should speak directly with their lender when they are concerned about maintaining payments.

Could property wealth support older homeowners?

Some homeowners aged 55 or over may consider equity release when retirement income is under pressure.

This is not a direct replacement for ordinary budgeting or debt advice.

A lifetime mortgage usually charges interest against borrowing secured on the home.

Where interest is not paid, it is normally added to the loan. This can reduce the estate’s future value.

The suitability assessment should consider:

• Age and health.
• Property value.
• Existing mortgage debt.
• Income and expenditure.
• State benefit entitlement.
• Future care needs.
• Moving plans.
• Family and inheritance objectives.
• Other available choices.

Connect Lifetime compares equity release with a traditional mortgage for older homeowners considering different borrowing structures.

Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits.

What did the 2023 evidence show?

The cost-of-living crisis did not create one single mortgage problem.

It changed several parts of the affordability calculation at the same time.

Essential spending increased. Interest rates rose. Credit commitments became harder to absorb.

Some fixed-rate borrowers remained protected temporarily. Others faced higher costs as their existing deals ended.

The central lesson was practical rather than political.

A mortgage remains affordable only while the wider household budget can support it.

That budget should be reviewed before a new application, before a fixed rate ends and before payment problems appear.

Frequently asked questions

Does inflation directly change my mortgage payment?

Not usually. Inflation does not directly change a fixed mortgage payment.

However, it can influence Bank Rate, mortgage pricing and household expenditure.

Can higher household bills reduce my borrowing amount?

Yes. Lenders consider expenditure and committed costs when assessing affordability.

Higher spending may reduce the amount supported by the assessment.

Will one missed payment prevent me from obtaining a mortgage?

Not necessarily. The result depends on the payment type, timing, amount and wider credit history.

Lender criteria also vary.

Should I remortgage when living costs rise?

A remortgage may be worth reviewing, but it is not automatically suitable.

Rates, fees, affordability, early repayment charges and total borrowing costs must be considered.

What should I do when I cannot maintain my mortgage payment?

Contact your lender as early as possible.

You may also need independent debt guidance where several commitments have become difficult to maintain.

Important information

This study reflects economic and mortgage conditions known by 2 June 2023.

Rates, lender criteria and support arrangements can change. Current advice should be based on present circumstances and available products.

Connect Mortgages is a credit broker and not a lender.

Your home may be repossessed if you do not keep up repayments on your mortgage or another loan secured against it.