BoE Money & Credit data: Mortgage borrowing plunges and consumer borrowing edges up as financial challenges mount

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

“October's sharp drop in mortgage borrowing was to be expected when you consider the catalogue of challenges hitting the housing market. From the sharp rise in borrowing costs and higher inflation impacting affordability to falling property prices and a looming recession, it is only natural for many consumers to pause or abandon buying plans.

“The decline in mortgage approvals also reflects the fallout from Kwasi Kwarteng’s disastrous mini budget, which saw buyers failing affordability checks or struggling to find a product at all after lenders pulled products amid soaring borrowing expectations. It left some buyers effectively locked out of the market as mortgage rates shot up to their highest levels in well over a decade at 6.65%* for an average two-year fixed product.

“With the political and financial turbulence easing since Rishi Sunak became Prime Minister following Liz Truss resignation on October 21, the lowest two-year fix has now dipped to just over 5%*. With the markets reassured on fiscal stability after the Autumn Statement and given the Bank of England’s gloomy recession forecast earlier this month, the Bank is now expected to raise interest rates from the current level of 3% to around 4.25% to 4.5% - a slightly more palatable peak than the 6% or more that had been feared after the Kwarteng mini-Budget.

“With the number of mortgage products available also recovering, it means banks are competing for new customers once again – increasing the chances for new buyers and those looking to refinance of securing a better deal.

“The slightly more upbeat outlook means less of a payment headache for those who already own properties when their current fixed-rate deals expire, but it does not remove all the pain for the property market. The rise in borrowing costs we have already seen means first-time buyers cannot afford as much as they could a year ago with sellers increasingly settling below the asking price and house prices expected to contract about 5% next year, according to Zoopla.

“For those with mortgage deals about to expire who haven’t locked in a new product, there are more options available now. Variable-rate mortgages, for example, are cheaper than fixed-rate deals, however they do track interest rates making it likely they will go up in the months ahead. However, once rates hit their peak next spring, they are expected to come down, so it could result in short-term pain for long-term gain.

“For those that prefer the security of fixed monthly payments, locking in a new fixed deal makes sense but perhaps choose a shorter tenure to give yourself more options further down the line.

“Whatever decision you make, remember the future is always uncertain with interest rates often dictated by global challenges. Over the past three years, the pandemic and the war in Ukraine have had massive implications for economies across the globe, and how the US Federal Reserve handles interest rates can be just as important as what the BoE does.

“With inflation at a 41-year high of 11.1%, the highest tax burden since the Second World War, the prospect of higher energy prices and a lengthy recession on the cards that places job security at risk, the mortgage misery is not entirely over yet.”

“Thanks to the onslaught of tearaway inflation, rising interest rates, cost-of-living hikes, higher borrowing costs, diminishing tax allowances and a recession, household budgets are being tested to the max. It’s no surprise then that consumers increased their borrowing to fund their higher living costs.

“While many households are trying to rein in expenditure to ensure they can pay their bills, the rise in credit card borrowing shows that some are seeking quick fixes to fill gaps in their income in the run-up to Christmas. These figures may jump even further with December typically the most expensive month of the year when consumers buy presents and extra food.

“Food inflation alone jumped 16.4% in the 12 months to October – the highest level since September 1977 – causing food sales volumes to drop 1%. Meanwhile retailers suffered the biggest quarterly sales fall since March 2021 when the UK was in lockdown.

“Ideally, credit cards should always be a last resort to balance the books, though 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. However, a balance transfer fee will be applied to the amount you transfer 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 pay them off before the 0% term expires.

“As the country heads into a recession, getting a grip on household finances will be key for consumers that not only want to start 2023 on the right financial footing but also want to end the year unscathed by the many money challenges ahead.”

“Rapidly improving savings rates have offered some cheer for savers in recent weeks with rates hitting highs not seen in over a decade, albeit returns are deeply negative in real terms once inflation is factored in. Households added £6.2 billion to their savings as a result as they not only cashed in on higher returns but also built up a financial buffer against the difficult year ahead.

“With the BoE’s base rate now 3% - the highest level since November 2008 -  some savers have held back from locking in fixed-rate deals in the hope that better offers were on their way. But with interest rate expectations much lower than they were in the wake of Kwarteng’s mini budget, it means savings rates may have already peaked.

“For those whose savings are sitting in accounts with dismally low returns – a hangover from the era of ultra-low interest rates – now would be the time to secure a better deal. But don’t forget that high inflation of 11.1% will still eat away at your returns.

“While saving money in an easy-access account makes sense for an emergency pot of cash to cover unexpected expenses, it is not the best option for larger sums. Up to £20,000 can be stored in a tax wrapper such as a Cash ISA or a Stocks & Shares ISA, which both offer tax-free returns.

“Sums in addition to that could be deposited in a workplace pension or Self-Invested Personal Pension (SIPP) which comes with 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% of the sum deposited – giving your pension pot an instant inflation-beating boost.”

* According to Moneyfacts