The trend of increased borrowing over a longer term to stretch affordability looks to have reached its limit, according to new research from UK Finance.

The financial watchdog found that the number of people taking out a mortgage fell at the start of the year and continued into the second quarter, with activity shrinking by almost a third compared to the same period of 2022.

UK Finance said this was due to both uncertainty in the market and record house prices.

Higher interest rates and the increased cost of living also made it harder for some borrowers to meet regulatory affordability tests.

In 2022, the proportion of customers borrowing over a longer period to make mortgages more affordable increased. However, this has started to slow and mortgage lenders now prefer customers with higher incomes and larger deposits.

Elsewhere, UK Finance found that consumer spending increased in the second quarter of this year in line with consumer confidence. While some of this can be attributed to price rises, the trade association said that people are still willing and able to spend, supported by savings built up during the pandemic.

“Whilst the cost of living challenges have created acute hardship for many, we have also seen that other consumers were largely able to pay off their credit card bills and meet their monthly mortgage payments,” said Eric Leenders, managing director of personal finance at UK Finance. “Some have been dipping into their savings to help to pay the bills, whereas some of those with savings have moved their money to accounts with higher rates to maximise their income.”

Leenders added that around 700,000 borrowers have come off their fixed rate deal in the first half of this year, likely finding themselves on a much higher rate.

However, these rates continue to be “largely affordable” because of stress tests applied when mortgages are originally taken out.

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