BoE Money & Credit report: Mortgage approvals rise in May while borrowing increases as cost-of-living crunch dents household budgets

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“While many would expect nervousness about inflation and household finances to be dampening people’s desire take on a mortgage as the cost-of-living crisis pummels consumer confidence, the uplift in net borrowing might appear the reverse is true.

“However, this data has been very volatile recently and while the UK property market may have defied expectations countless times over the past couple of years, runaway inflation, rising borrowing costs and the fallout from Russia’s invasion of Ukraine are now set to take their toll on what has been an overheated sellers’ market.

“Yes, approvals for house purchases were slightly up in May, compared to April, but April had already seen a significant drop on the March figure of 69,500 – so the cooling process was already underway.

“Lender Nationwide revealed in its latest House Price Index earlier this week that annual house price growth eased back for the third consecutive month, with tentative signs of a slowdown as surveyors report some softening in new buyer enquiries.

“With pressure on household finances set to intensify in the coming months amid rampant inflation, and the BoE expected to respond with further interest rate hikes, Nationwide sees the market slowing further in the coming months.

"The BoE data revealed that the “effective” interest rate – the actual interest rate paid – on newly drawn mortgages increased by 13 basis points to 1.95% in May, with lenders already pushing up mortgage rates this year following five base rate increases by the Bank of England since December last year

“Fears of more rate rises has created a sense of urgency in the market as borrowers reassess what they can afford and look to lock in new deals now.

“Many homebuyers and remortgagers are seeking longer-term fixed-rate mortgages, with five-year deals particularly popular and searches for 10-year deals on the rise.

“While locking into a deal at today’s relatively low rates makes good sense, borrowers must consider their future plans carefully. If they intend to move home within the next five to 10 years, their fixed-rate mortage could be transferred to another property.

“But, if they you later choose to leave their fixed-rate deal then exit penalty charges could apply, making it an expensive option that erodes any savings made on bagging the low interest rate for a few years.”

Alice Haine said: “Today’s figures on consumer credit borrowing reflect the challenges people are facing as the cost-of-living crisis tightens its grip on household expenditure.

“As food, fuel and energy prices spiral ever higher, some have little option but to turn to credit to sustain a decent standard of living – though the uplift in May was down on the April figure, it is perhaps a sign that people are now tightening their belts and spending less

“The worry is that with inflation at 9.1% in May and expectations it will rise to 11% later this year when energy regulator Ofgem expects the price cap for gas and electricity bills to hit £2,800 – some might see their debts spiral out of control as price rises continue to outstrip wage growth.

“BoE Governor Andrew Bailey warned earlier this week that households are being hit by a very large national real income shock, with the reality for most people that their salaries simply don’t stretch as far.

“UK household incomes dropped for the fourth quarter in a row in the first three months of the year with disposable income down 0.2%, according to recent Office for National Statistics data, with worse to come as these figures reflect the period before April’s jump in energy bills and higher taxation.

“With the outlook for food, fuel and energy prices looking particularly grim, the only way to beat the financial squeeze without taking on debt is to slash budgets now. Even those who are coping now, perhaps clearing their credit bill at the end of every month, should start to pay attention to their finances.

“If people start consistently living beyond their means and then only repaying the minimum balance each month, interest rate charges on outstanding balances can quickly compound out of control. There is also the risk of missing credit payments altogether, damaging a borrower’s credit record in the process.

“The best strategy is to spend some time analysing your finances to work out what can be cut out from your monthly spending or pared back. That will free up cash for the essentials, such as food and fuel, and hopefully build up a financial buffer against a further assault of price rises in the months ahead.

“Those with niggling debts they cannot clear within a month or two could also consider a 0% balance transfer deal, where you get a new card to consolidate the debts and then have 0% interest applied for a set period.

“Alternatively, those with short-term borrowing needs could consider a 0% spending credit card, where they receive a set number of months when no interest is applied to new purchases. For both these options, the onus is on the borrower to pay off the debt during the 0% period.

“For those fearful about the future, the only consolation is that July will see typical workers receive an annual saving of £330 when the new National Insurance threshold kicks in on July 6. The increase means those earning under £12,570, will receive a complete break from NI payments, while even higher earners will benefit from the mini-boost to their pay packets.

“July will also see eight million vulnerable households receive the first of Rishi Sunak’s cost-of-living cash payments of £326 on July 14, offering additional relief for those struggling the most. This will be followed by a second instalment in the Autumn, forming part of a £1,200 support package for those hardest hit by the cost-of-living crisis.

“But with real wages falling, the handouts may offer little respite for those already drowning in debt. Those in serious trouble should first contact their providers to ask for their support. If the situation is still unresolved, then seek independent guidance from debt support organisations that can offer strategies to prevent overspending and help dealing with creditors.”

Alice Haine said: “While the May figure is slightly down on April, hopefully this is a sign that people are already tackling their spending and storing up any spare cash to ensure their finances remain robust going forward. When the outlook is as bleak as it is now, being prepared for the worst is the best strategy to ensure you exit 2022 with your finances still in positive territory.

“A good rule of thumb is to have between three to six months’ worth of expenses stashed away in an emergency bank account to ensure you can meet any surprise expenses that crop up, such as a fridge needing repair or a car breaking down.

“A savings account can also be an effective way to help keep a new budget on track, as you can create separate pots for a holiday or another short-to-medium term goal such as a wedding, so that the money does not get tangled up with your regular monthly bills.

“While the slight uplift in time deposit saving rates is welcome news as it means the value of your emergency fund won’t be entirely eroded by inflation. But despite the base rate now sitting at 1.25% following the BoE’s fifth rate hike in a row earlier this month, banks are slow to pass on the benefits to savers.

“For longer-term savings targets, those with a time horizon of at least five years or more, it is better to invest your money in the stock markets, using tax-efficient vehicles such as an Individual Savings Account (ISAs).”

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