BoE Money & Credit data: Mortgage lending soars despite market chaos  

  • Net borrowing of mortgage debt by individuals increased to £6.1 billion in August, up from £5.1 billion in July, and remaining above its 12-month pre-pandemic average up to February 2020 of £4.3 billion.
  • Mortgage approvals for house purchases increased sharply to 74,300 in August from 63,700 in July. This is the highest level since January 2022 (74,500), and a notable rise following a downward trend over the previous several months.

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Published: 30 Sept 2022 Updated: 30 Sept 2022

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

“The sharp jump in mortgage borrowing in August and corresponding rise in mortgage approvals is a sharp contrast to the chaos currently engulfing Britain’s stagnating property market.

“Net borrowing of mortgage debt rose by 19.6% to £6.1 billion in August, from £5.1bn in July, while approvals increased sharply to 74,300 – the highest level since the start of the year - perhaps reflecting an urgency in the market as buyers raced to get deals across the line before interest rates rose any further.

“That urgency may change into something far darker with the Bank of England signalling a significant rate rise in November in the wake of Chancellor Kwasi Kwarteng’s now infamous tax cutting ‘mini budget’ and the mortgage market descending into chaos.

“Kwarteng’s decision to push ahead with a raft of tax cuts expected to be funded in large part by extra borrowing, including cuts to basic rate income tax and stamp duty, as well as scrapping the 45p additional rate of income tax, spooked the financial markets and raised fears that the Bank of England would have to increase the base rate as high as 6% next year to counteract the inflationary effects of his radical fiscal plan.

“When a plummeting pound and a sharp fall in bond prices later placed pension funds using complex risk hedging investments under pressure, the Bank of England was forced to step in with a £65bn bond-buying programme to stabilise the markets.

“The intervention may have soothed the bonds markets and the pound for now, with the Pound having rallied off a low of $1.04 to $1.12, but the effect on Britain’s mortgage market of rate rises that began in December 2021, and which have become increasingly aggressive, is far from over.

“Lenders have pulled more than 1,000 mortgage products over the course of the week and are even reneging on provisional offers as they assess the changing borrowing conditions. This has left some borrowers unable to secure a loan at all while others, with agreements in principle in place, suddenly find their offers have been withdrawn.

“With interest rates already at 2.25% and expected to jump significantly over the coming months, chatter of a mortgage time bomb is getting louder as those on fixed-rate deals expiring soon could now see huge sums added to their monthly repayments when they come to renew.

“Some customers could potentially fail affordability checks as banks and building societies hike mortgage rates if they attempt to switch to a new lender meaning they will either be stuck with their existing provider’s offer or face going onto the Standard Variable Rate - typically the most expensive way to borrow.

“At a time when households are still grappling with the worst bout of inflation in 40 years, as food and energy prices edge ever higher, absorbing seven interest rate rises since December last year was already taking its toll on mortgage prices – in turn impacting the housing market.

“House prices have already started to stagnate, with the typical value of a home flatlining at £272, 259 in September – a 0% rise on August, according to the latest Nationwide House Price Index – the first time house prices haven’t grown in monthly terms since July last year. While prices were still 9.5% higher than the same month a year ago, it was the first single digit percentage gain since October last year, indicating that the market will certainly cool further in the months ahead.

“The chancellor’s decision to slash stamp duty thresholds will do little to allay fears about the future of the housing market. While the taxation cost associated with buying a home may be reduced by the stamp duty changes, buyers must still contend with much higher mortgage rates than they were a year ago and the new issue of being able to source a mortgage at all.

“The risk now is that the market gets flooded with sellers as homeowners, fearful they cannot afford higher mortgage repayments coming down the line, make a last ditch to sell before the base rate rises again – as it is expected to do so next month.

“Couple this with people being priced out of the mortgage market altogether or buyers putting purchase plans on hold until the mortgage mayhem has calmed down and demand for homes could plummet at a rapid pace.

“For buyers considering entering the market right now, it might be wise to take a step back for a week or so to let the market absorb the events of the last few days and give banks and building societies time to relaunch new products.

“The chaos in the sector is fast moving and how far house prices will fall from here is a guessing game at this highly volatile juncture, but mortgage panic has swept the market amid warnings of a 15 or even 20 per cent fall in property prices.

“One thing’s for sure, the end of 2022 will be very different to the start of the year with first-time buyers potentially frozen out and existing homeowners facing a huge hit to their disposable incomes when their fixed-rate deals expire.

“The only gainers in all of this will be those who locked in long-term deals a year ago before interest rates started going up, as well as cash buyers who might not only have more stock to choose from but also far more room to negotiate on price.

“Any decision to buy must now be considered very carefully to ensure budgets can absorb much higher mortgage repayments. The best advice for those determined to push ahead is to get all your paperwork in order. Deals are appearing and disappearing very quickly so you must be nimble to secure a deal. While the best strategy is to lock in a new mortgage deal now before rates increase further as the offer will remain valid for up to six months, the difficulty in the near term is securing an offer at all.”

Individuals borrowed an additional £1.1 billion in consumer credit in August, on net, following £1.5 billion of borrowing in July (Chart 2). This remained above the 12-month pre-pandemic average up to February 2020 of £1.0 billion. The additional consumer credit borrowing in August was split between £0.7 billion on credit cards, and £0.4 billion through other forms of consumer credit (such as car dealership finance and personal loans). 

Alice Haine said: “The jump in consumer borrowing reflects the dire straits some people’s finances are now in. Savings built up during the Covid-19 pandemic have been used up and households are trying to keep their finances afloat in the face of high inflation, rising interest rates and falling real wages.

“With so much pressure on household budgets, it’s no surprise that most of the rise on borrowing was focused on credit cards as households looked for an accessible solution to meet rising costs.

“The government’s cost-of-living handouts may be kicking in, with the most vulnerable receiving cash sums to help them cope with rising prices and all households receiving a £400 rebate on their energy bills, but the spending power of those handouts has already been compromised by high inflation, which is expected to top 11% in October.

“Even a reversal of the 1.25% hike in National Insurance Contributions from November, and the 1 pence cut in the basic rate of income tax from next April - does not provide much cheer. That all seems a long way off when the soaring cost of mortgage borrowing is expected to significantly reduce disposable incomes in the near term.

“This could see more households turning to credit – and credit cards in particular – to keep finances afloat. But with real wages declining rapidly and any pay rises to offset that decline quickly swallowed up by persistent price rises, the risk for some is that they find themselves with debt levels that quickly spiral out of control.

“This is not the right time to be spending beyond your means. Households should scrutinise household budgets carefully, stripping out any unnecessary spending to ensure they can not only meet their everyday bills but also be prepared for higher mortgage payments if they are remortgaging soon.”

The effective interest rate paid on individuals’ new time deposits with banks and building societies rose from 1.72% in July to 1.94% in August. 

Alice Haine said: “The only bit of good news this week has been rapidly improving savings rates, which are now jumping up at the fastest pace since the cycle of interest rate hikes started at the end of last year.

“With the best easy access accounts now topping the 2% mark and fixed rate accounts - where cash is locked away for a set period - hitting 4.32%, savers can finally get a decent-ish return on their nest eggs.

“But with interest rates rising all the time, it is imperative to make your savings work as hard as possible so switch accounts if your provider is not delivering a competitive return.

“While holding an emergency pot of cash in an easy-access savings accounts makes sense in these turbulent times, particularly if you have a mortgage deal expiring soon, don’t stash more than you need as higher savings rates are still no match for inflation of 9.9%.

“One way to fight inflation head on is to direct more money towards pension savings. While stopping or reducing payments into a workplace pension or Self-Invested Personal Pension (SIPP) may seem a good idea in these constrained times, the best strategy is to actually increase your contributions – if you can.

"This ensures you gain from the gift of free cash in the form of tax relief. This is automatically granted on taxpayers’ pension contributions at 20% of the amount going in, while higher rate taxpayers can claim back an extra 20% – effectively giving your pension pot an inflation-beating bump up.

“The markets might seem volatile right now, but time in the markets, rather than timing the markets, is the secret to riding out the daily ups and downs that can worry investors in the short term. By staying invested no matter how the markets are performing, it means investors avoid missing the ‘good days’ when share prices can increase significantly.”

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