BoE Money & Credit report: Mortgage lending dips while consumer borrowing soars

  • Net borrowing of mortgage debt by individuals decreased slightly to £5.1 billion in July, from £5.3 billion in June (Chart 1). This is above the pre-pandemic average of £4.3 billion in the 12 months up to February 2020.
  • Approvals for house purchases, an indicator of future borrowing, increased slightly to 63,800 in July, from 63,200 in June, which is below the 12-month pre-pandemic average up to February 2020 of 66,800.

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Published: 30 Aug 2022 Updated: 30 Aug 2022

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

“The slight drop in mortgage borrowing in July confirms expectations that Britain’s property market is finally starting to cool as the cost-of-living crisis and rising interest rates impact affordability.

“However, mortgage approvals still rose slightly in July to 63,800 from 63,200 in June, perhaps a sign that buyers were snapping up properties before interest rates rose any further. But with inflation rising at a rapid pace and six interest rate rises since December last year, many buyers are being forced to rethink whether now is the right time to purchase a home.

“In the months ahead, some may choose to delay buying until the market softens or the Bank of England eases back on its interest rate hiking cycle. With the financial markets already pricing in interest rates rising to 4% by next May from 1.75% today amid concerns over runaway inflation and soaring energy prices, those looking to buy need to weigh up their decision carefully. Should they buy now when rates are lower or buy later when the market cools, running the risk of a much more expensive mortgage?

“A downturn in the housing market now seems increasingly likely but how heavy that will be is still unclear. While there are some expectations house prices will fall 4% in 2023, others predict drops of up to 10% by the end of 2024.

“The crunch point is likely to come at the end of this year when the full effects of rising inflation and energy prices hit home but the hit to property prices could be heavier if the expected recession leads to job losses and runaway inflation forces the Bank of England to push interest rates ever higher.

“Whether house prices are already falling depends on which index you track, however, Halifax House Price Index for July found average prices dipped 0.1% on the month while Rightmove’s House Price Index recorded a bigger drop for August of 1.3%. But with prices still up on the year, 2022 should still end up positive for the market overall.

“The end of the year will be very different to the start, however, with first-time buyers potentially priced out of the market, which will increase the softening in demand. Thanks to higher mortgage rates over the course of 2022, first-time buyers now need an extra £12,250 of income to secure a home compared to a year ago, according to Zoopla.

Affordability will become the key issue and with fewer mortgage products to choose from, the market could quickly switch from a seller’s heaven to a buyer’s delight with more room for negotiation on price.

“With the pressure on household finances intensifying in the coming months as inflation, already at 10.1% and expected to peak at over 18% in January when the energy watchdog will hike the cap on bills once again – more interest rate rises are on their way. 

“Borrowers who secured killer two-year deals in 2020 when rates were still at record lows are set for a hefty increase if their fixed rate is expiring soon as interest rates are currently averaging 4%. The best strategy is to lock in a new deal now before rates increase further as the offer will remain valid for up to six months.”

Individuals borrowed an additional £1.4 billion in consumer credit in July, on net, following £1.8 billion of borrowing in June. The additional consumer credit borrowing in July was split between £0.7 billion on credit cards, and £0.7 billion through other forms of consumer credit (such as car dealership finance and personal loans).

Alice Haine said: “The rise in consumer credit borrowing reflects just how strained people’s finances are now becoming amid the cost-of-living crunch. Savings built up during the pandemic are being used up and people are now turning to credit to maintain their standard of living as soaring inflation, painfully high energy bills and falling real wages eat into disposable incomes.

“It seems July’s National Insurance threshold change, which boosted millions of monthly incomes by £30, and the first cost-of-living payment of £326 hitting the accounts of the most vulnerable households did little to prevent people from turning to debt.

“For many, those mini income boosts will seem like a distant memory as they face the prospect of energy bills rising by 80% from October 1, after Ofgem confirmed last week that the energy price cap will jump to £3,549 – equating to bills of almost £300 a month on average for the typical home.

“The pressure is mounting on Liz Truss and Rishi Sunak, the two contestants battling it out to become the next Prime Minister, to deliver the right deal to offset the costs catastrophe hurtling towards many households. Do too little and even more households will fall into debt, do too much and they risk stoking inflation even further. 

“Turning to credit – and credit cards in particular – is already becoming the go-to option for many 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 time to be spending beyond your means. Households should take an axe to their household budget, slashing all unnecessary spending to help keep their finances afloat and even more drastic measures, if needed, such as switching from driving a car to taking public transport where possible to reduce their outlay. But with many already trimming their spending, there may not be much more they can cut out.

Adopting frugal habits now will pay off as the cost-of-living edges up in the months ahead. Taking control of your finances now by monitoring how much is in your bank account and how much you spend on a daily, weekly or monthly basis will be a vital strategy for those at risk of falling into debt.” 

Meanwhile, the effective interest rate paid on individuals’ new time deposits with banks and building societies rose from 1.58% in June to 1.72% in July.  

Alice Haine said: “Rising rates on savings accounts is always a cause for celebration, but not when any money stashed away is quickly ravaged by sky-high inflation. Holding some emergency cash in easy-access savings accounts still makes sense, however, as everyone will need an emergency stash of cash to fall back on this winter.

“With rates now as high as the 2% mark, savers must make sure they switch to a better account particularly if their provider has not passed on the interest rate rises already. Your emergency funds need to work as hard as possible as they are i against rampant inflation, which devalues cash holdings fast.

"A financial buffer has never been more important in the wake of Ofgem’s latest energy price cap rise to £3,549, which will see bills rise by 80% from October 1. A good target to aim for is between three to six months’ worth of expenses stashed away to cover any unexpected expenses as well as higher utility bills.  

“If you are lucky enough to already have an emergency pot in place, then money directed towards pensions and investments has a better chance of beating inflation over the long-term. 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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