BoE Money & Credit data: Mortgage approvals drop and consumer borrowing eases as cost-of-living crunch hits home

  • Net borrowing of mortgage debt by individuals remained at £6.1 billion in September. This is above the past 6-month average of £5.7 billion.
  • Approvals for house purchases, an indicator of future borrowing, decreased significantly to 66,800 in September, from 74,400 in August, but were above the past 6-month average of 67,200.

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Published: 31 Oct 2022 Updated: 01 Nov 2022

“Flat mortgage borrowing in September is clear a reflection of the cooling property market as rampant inflation and rising borrowing rates impact affordability – with some buyers downgrading the size, location or value of the home they purchase to ensure they can still meet monthly payments.  

“The sharp decline in mortgage approvals also highlights the market mayhem seen last month as buyers scrambled to lock in new deals in the face of rapidly rising borrowing rates and a troubling political environment. 

“The panic in the market in the first three weeks of September might have been driven by rising interest rate expectations - with the Bank of England increasing the base rate by 50 basis points on September 22 to 2.25% - but the situation escalated dramatically when former Chancellor Kwasi Kwarteng unveiled his radical fiscal plan of unfunded tax cuts a day later. 

“The ‘mini budget’ spooked the financial markets, raising fears of base rates as high as 6% with lenders pulling almost 2,000 mortgage products and even reneging on existing provisional offers as they frantically reassessed borrowing conditions. Mortgage rates jumped as high as 6.65%* for an average two-year fixed product – from a level of 4.74% on the morning of Kwarteng’s fiscal statement.  

“While the situation may have eased slightly since Rishi Sunak became Prime Minister following Liz Truss’s short tenure as leader with the average two-year fix dipping to around 6.5%, this is still almost triple the level it was 12 months ago. 

“It means the mortgage pain is far from over for buyers who face another base rate rise this week leaving those with fixed mortgage products expiring this year or next facing a very challenging mortgage landscape to the one they left. 

“With inflation still at a 40-year high of 10.1% - and expected to peak above 11% - and both Sunak and new Chancellor Jeremy Hunt warning that fiscal tightening is on its way, a long and deep recession in on the cards causing even further financial misery for workers who may have to contend with job loss in addition to higher living costs. 

"This leaves mortgage customers with fixed deals expiring soon with difficult decisions to make, with even variable mortgages making a comeback despite the high-interest environment. For those likely to fail affordability checks if they look to remortgage now, their only option is to stick with their existing provider’s offer or face going onto the Standard Variable Rate (SVR) - typically the most expensive option. However, the SVR might not be the costlier choice in these uncertain times – plus, it gives the borrower more flexibility if they want to overpay or snap up a new deal further down the line.  

“To decide which option is best, homeowners should compare the revert rate on their current deal with the cost of remortgaging. If the SVR is cheaper than a new fixed deal, either with their lender or another provider - it might be worth sticking with the SVR for now and switching when the market is more favourable. While they might save in the short term, however, they need to brace themselves for further base rate rises and the risk they end up with fewer or more expensive options further down the line if borrowing costs continue to rise. 

“Tracker mortgages might be a good option for some first-time buyers and those looking to remortgage – as they are currently the cheapest way to purchase a new home or refinance, as they follow the BoE’s base rate with a set percentage of top, such as 1%. The decision to go down the tracker route comes down to a person’s risk profile. Yes, fixed mortgages offer certainty on monthly payments for a set period of time - a good thing if mortgage rates continue to climb - but if rates later come down, those locked in to fixed deals will miss out on lower payments. 

“The BoE is expected to raise interest rates by 50 or possibly 75 basis points – which would take the policy rate from 2.25% to 3% on November 3 – its eighth interest rate rise since last December as it strives to tame rampant inflation with expectations rates will peak as high as 5% next year. 

“With so many ifs and buts and maybes, advice from an independent mortgage broker will be key for homeowners struggling to calculate the best deal for their personal finances going forward particularly when you consider that the mortgage mayhem is set against a cooling property market. 

“While the UK property market has have proved resilient through much of 2022 despite the wider economic uncertainty caused by global challenges such as the war in Ukraine, a slowdown is now underway with house prices falling in September and a potential double-digit decline in 2023 as the cost-of-living crunch tightens its squeeze on household budgets and mortgage rates continue to rise.” 

Individuals borrowed an additional £0.7 billion in consumer credit in September, on net, following £1.2 billion of borrowing in August (Chart 2). This was the lowest level since December 2021 (£0.3 billion). The additional consumer credit borrowing in September was split between £0.1 billion on credit cards, which fell from £0.7 billion in August, and £0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans). 

“Double-digit inflation, rising interest rates and falling real wages are a Halloween horror story for ordinary people trying to pay their household bills on time, with the rise in consumer borrowing a stark reflection of the difficult choices people must make in this challenging economic environment. 

“However, while the pace of unsecured lending cooled in September compared to August – this is likely a reflection of people tightening their belts as they brace their finances for difficult days ahead. 

“Those that have already trimmed life’s little luxuries from their budgets, such as gym memberships, TV subscription services and takeaways, are still struggling to constrain their spending in the face of the soaring prices. 

“Food inflation alone jumped almost 15% in the 12 months to September and with rising borrowing costs making mortgages so much more expensive, it leaves household budgets with limited wiggle room in the run-up to Christmas. 

“The government’s cost-of-living handouts may be boosting some current accounts, 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 purchasing power of this support is being eroded by high inflation. 

“Even the reversal of the 1.25% hike in National Insurance Contributions, which will boost worker’s incomes by £330 a year on average from next month, will offer little respite from the double blow dealt by the cost-of-living and borrowing crises. 

“While credit card borrowing cooled in September compared to August with less households seeking quick fixes to fill gaps in their income – these figures are likely to jump upwards in the run-up to Christmas. 

“Credit cards should always be a last resort to balance the books, but they can be a cost-effective short-term borrowing option if a consumer signs up for 0% balance transfer or spending card. These offer a set term where no interest is applied on a balance transfer or new purchases - reducing the cost of that credit and the risk of debts compounding out of control. Remember, a balance transfer fee will be applied to the balance so only use this credit option if you cannot clear the balance for several months and don’t forget these types of cards are only cost-effective if you actually pay them off. 

“For those already drowning in debt, this is not the time to be spending recklessly or hoping a lottery win will clear your problems. Seek guidance from a debt counsellor who can help you restructure your liabilities; there are plenty of debt support organisations that offer this guidance for free. 

“As the country edges closer to recession, getting a grip on your finances is vital to ensure you can not only meet your everyday bills but also have a buffer against higher living and borrowing costs that are likely to last throughout the winter – and potentially beyond.” 

The effective interest rate paid on individuals’ new time deposits with banks and building societies rose from 1.94% in August to 2.49% in September, the largest monthly increase since December 2021 when Bank Rate began rising.  Households deposited an additional £8.1 billion with banks and building societies in September, compared to £3.2 billion in August. This was the biggest increase of household deposits since June 2021 (£9.9 billion). Within the household deposits measure, flows into time deposits increased to £3.4 billion in September from £1.1 billion in August. 

“Rapidly improving savings rates are the one bright spark in all this economic gloom, but it’s a case of use it or lose it if you want to secure a competitive return.  

“Households may have deposited the most since June 2021 in September, a sign that people are bolstering their reserves in the face of multiple financial challenges, but savers that don’t lock in higher savings rates are missing out, particularly if their pots are sitting in accounts with dismally low returns – a hangover from the era of ultra-low interest rates. 

“Savings rates have been rising steadily since the cycle of interest rate hikes started at the end of last year with the best easy access accounts now hitting the 2.5% mark and fixed rate accounts - where cash is locked away for a set period - up to 5.05% 

“Consumers should shop around for the best return – either by checking comparison sites or signing up to a savings platform that allows savers to manage multiple accounts with different banks and switch with ease. This is because, while savings rates are high – they are still no match for inflation of 10.1%, so you need to make your money work as hard as you can. 

“One thing to keep an eye on is tax, because if you start earning interest above the personal savings allowance of £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers then you may be liable to pay tax on your savings pots. 

“While saving money in an easy-access account makes sense for an emergency pot of cash, but it won’t make sense for larger sums that could either be stored in a tax wrapper such as a Cash ISA or a Stocks & Shares ISA, which both offer tax-free returns. Just remember, you can only save £20,000 per tax year into an ISA.” 

* According to Moneyfacts 

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