BoE Money & Credit report: Mortgage lending plummets and consumer borrowing soars

  • Net borrowing of mortgage debt by individuals decreased to £5.3 billion in June, down from £8 billion in May but remains above its 12-month pre-pandemic average up to February 2020 of £4.3 billion.
  • Approvals for house purchases, an indicator of future borrowing, decreased to 63,700 in June, from 65,700 in May, which is below the 12-month pre-pandemic average up to February 2020 of 66,700.

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Published: 29 Jul 2022 Updated: 29 Jul 2022

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

“The monthly decline in the total amount of borrowed could be the clearest sign yet that nervousness over inflation and the crippling cost-of-living crisis is finally seeping into the UK’s red-hot property market.

“While the drop in mortgage approvals to 63,700 in June from 65.700 in May could indicate that buyers and lenders are approaching the market with more trepidation, this data set has been very volatile in recent months.

“The defiant data for May - when mortgage lending rose by the most in eight months despite the headwinds caused by soaring inflation - is certainly testament to that.

“But club the BoE’s June data with reports of a softening in new buyer enquiries and a rise in mortgage switches as homeowners race to secure lower rates on their existing properties before interest rates ramp up further, and it seems the housing market, which boomed during the Covid-19 pandemic, is finally losing momentum.

“Whether the market will see house prices go into a full decline is less likely as the lack of homes for sale is widely expected to continue underpinning the market for now. For buyers, however, there may be more wiggle room to negotiate a better deal rather than committing to the full asking price at the outset to beat competition.

“With pressure on household finances set to intensify in the coming months as inflation, already at 9.4% and expected to hit highs of 12% in October when the energy watchdog will hike the cap on bills, it's only natural for the BoE to respond with further interest rate hikes.

“For the unfortunate borrowers who secured killers deals in the summer of 2020 when rates were at record lows, emerging into the new mortgage landscape will certainly be a difficult challenge. For anyone with a fixed deal set to expire this year, the best advice is to lock in a new rate now as they can remain valid for up to six months.”

Individuals borrowed an additional £1.8 billion in consumer credit in June, on net, following £0.9 billion of borrowing in May.  The additional consumer credit borrowing in June was split between £1 billion on credit cards, and £800 million through other forms of consumer credit (such as car dealership finance and personal loans).

Alice Haine said: “The jump in consumer credit borrowing highlights just how challenging the cost-of-living crisis is becoming for people across the country as soaring inflation, rising interest rates and falling real wages hit disposable incomes hard.

“While the National Insurance threshold change this month boosted millions of monthly incomes by £30, with the first cost-of-living payment of £326 also hitting the accounts of the most vulnerable households, this can go only go so far to prevent some people from falling into debt.

“With Liz Truss and Rishi Sunak battling it out to become the next Prime Minister, it means any further respite from new fiscal policies is still some way off, leaving households to sweat it out as the cost-of-living crisis heats up further.

“As runaway inflation becomes the norm, turning to credit – and credit cards in particular - to keep finances afloat may become the only solution for some as lockdown savings slowly get whittled down and pay rises are swallowed up by persistent price rises.

“The impact of rising prices, caused by global economic factors including the Ukraine war, saw the International Monetary Fund lower its UK growth forecast to just 0.5% in 2023, indicating that the pain could continue for some time.

“With households also depositing significantly less into banks and building societies in June than May – £1.5bn versus £5.2 billion - it indicates that people are already spending more of their incomes to meet everyday bills.

“It is imperative therefore that households take matters into their own hands to soften the blow from the great financial squeeze. Take charge by becoming the Chief Financial Officer of your household by scrutinising the monthly budget and slashing expenditure every way you can.

“From setting strict limits on grocery shopping, to scrapping any non-essential purchases and going out less, Britons might have to adapt to a slightly more restrained lifestyle if they want their finances to survive the winter of discontent when energy prices are set to scale new heights.

“The alternative is spending beyond your means and building up debt that quickly compounds into a very serious problem. The key to all the financial challenges that lie ahead is to take control of your finances now, monitoring your expenditure monthly, weekly or even daily if necessary to stay on track.”

The effective interest rate paid on individuals’ new time deposits with banks and building societies rose from 1.25% in May to 1.58% in June.  

Alice Haine added: “At a time when having an emergency fund has become a priority, savings rates are increasing, albeit slowly. However, while the uplift in time deposit saving rates is welcome news, it won’t stop inflation eroding your back-up pots of cash but that does not mean you don’t need one either.

"With some studies warning that energy bills could hit £500 for a single month by next year as President Putin’s gas supply cuts drive up prices across Europe, a financial buffer has never been more important.

“A good target to aim for is between three to six months’ worth of expenses stashed away in an easy-access account. This will cover any surprise expenses that crop up, such as car repairs or a boiler replacement, as well as higher utility bills.

“Bestinvest’s financial coaches advise having an even bigger emergency pot to cover 12 months’ expenses to ensure household finances are totally bullet-proof against all the shocks to come.

“Once that buffer is in place, those with a time horizon of at least five years or more can hit bigger savings goals such as paying for a child’s education or retirement by investing money in the stock market using tax-efficient vehicles such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).”

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