The demand for mortgages is falling amid the rising cost of living as borrowing increases

The amount of money lent from new mortgages fell by a third in June while credit card borrowing jumped by £1 billion, as households adjusted to the rising cost of living.

Mortgage debt fell by a third (33.75 per cent) compared to May and now stands at £5.3bn, although still above pre-pandemic levels of £4.3bn.

However, while mortgage borrowing fell, consumer borrowing increased, as people took out an extra £1.8bn, including £1bn on credit cards, according to figures from the Bank of England.

The amount that households save has also fallen, with deposits in savings and NS&I accounts falling to £1.9bn in June, down from £5.6bn in May.

Data suggests that the cost-of-living crisis is driving clients to rely more on credit while dampening the housing market.

Increasing inflation also increases the interest charged on mortgages. The “effective” interest rate – the actual interest rate paid – on new mortgages also rose by 20 basis points (0.20 per cent) to 2.15 per cent in June.

The outstanding mortgage rate rose by 4 basis points to 2.11 per cent as the Bank of England raised interest rates.

There are also signs of a slowdown in the housing market with home approvals, an indicator of future borrowing, falling to 63,700 in June, from 65,700 in May, which is below the pre-pandemic 12-month average through February 2020 of 66,700.

Tomer Aboudi, Director of Property Lending at MT Finance, says: “It is not surprising that mortgage approvals for new purchases fell in June as some of the pressure was taken out of the market.

“With the potential for higher mortgage rates on the cards, buyers are taking advantage of the last remaining low rates before the inevitable rise, with those who re-mortgages desperate to lock in a fixed-term mortgage for as long as possible.”

The numbers reflect home purchases that were agreed upon several months in advance, indicating that the appetite for new mortgages could continue to decline.

Jeremy Leaf, North London estate agent and former RICS Chairman, adds: ‘Although these figures reflect activity for at least a few months, it is not surprising that borrowing is not as strong as it used to be.

Mortgage approval numbers, which show the underlying strength of the market, also fell in June to below the 12-month average. However, the lack of inventory and relatively low interest rates despite the high cost of living still support the market somewhat.

The figures bring the annual growth rate of all consumer credit to 6.5 percent in June. The highest rate since May 2019 (6.5 percent).

Credit card borrowing is on the rise

The annual growth rate for credit card borrowing in the year ending in June was 12.5 percent, while the growth rate for other forms of consumer credit such as personal loans and auto financing was 4.1 percent.

These were the highest rates since November 2005 (12.6 percent) and March 2020 (5.6 percent), respectively.

Paul Heywood, chief data and analytics officer at Equifax commented: “With prices rising and disposable income shrinking, consumers are having to find ways to increase the money flowing into their checking accounts.

Higher-income households are increasingly turning to their savings, reversing a trend seen during the pandemic, while lower-income earners are turning to the credit industry to help them weather the storm.

Applications for credit are now back to pre-pandemic levels, and with the cost of living crisis still playing out, that demand isn’t going anywhere.

Credit is also becoming more expensive. New personal loan rates to individuals rose 0.022 percent to 6.71 percent in June, but remained just below the pre-pandemic level of 6.9 percent.

The effective rate of interest-bearing credit cards increased by 19 basis points (0.19 percent) to 18.56 percent, staying one basis point above the February 2020 level.

Family savings decreased by £3.7 billion

Combined household deposits in savings and NS&I accounts were £1.9bn in June, down from £5.6bn in May and below the net monthly average of £4.7bn in the 12 months before the pandemic.

Rosie Hooper, Quilter’s certified financial planner, said: “New money and credit statistics from the Bank of England show that the amount of people saving has fallen while consumer credit has increased. These are worrying figures that show the strain the country’s finances are currently in.

It is clear that the cost of living crisis is starting to hamper people’s ability to save money for the future as it is being absorbed by the price hike.

The increase in borrowing is really cause for concern, as while it is still warm, the worst of the energy crisis is not in effect.

“As the night approaches and the temperatures drop, things can get significantly worse. Credit cards have some of the highest interest rates, and if borrowing is to pay current high costs of living or pay essential bills, people can quickly spiral into unmanageable debt.”