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Mortgage lending dips as UK property market cools

Mortgage  Colourful houses in Notting Hill, west London. The stamp duty holiday announced in 2020 is expected to be extended until the end of June, as part of budget measures to be announced next week by chancellor Rishi Sunak. Picture date: Wednesday February 24, 2021. Photo credit should read: Matt Crossick/Empics
Mortgage purchase approvals remain below the 12-month pre-pandemic average. Photo: Matt Crossick/Empics

Mortgage borrowing has dropped slightly amid rising interest rates, figures from the Bank of England (BoE) show.

Net mortgage borrowing decreased slightly to £5.1bn ($5.98bn) in July, from £5.3bn in June, while gross lending rose to £26.1bn in July from £24.6bn June. Gross repayments increased to £20.8bn, from £19.4bn.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 18 basis points to 2.33% in July and is the highest since June 2016 (2.39%).

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“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,” Alice Haine, personal finance analyst at Bestinvest, said.

“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,” she added.

Approvals for house purchases, an indicator of future borrowing, increased slightly to 63,800 in July, from 63,200 in June. Despite the increase, approvals remain below the 12-month pre-pandemic average up to February 2020 of 66,800.

“After gross mortgage lending fell slightly in June, it is positive to see a slight increase in July, despite the cost of living continuing to rise. Whilst it’s becoming increasingly clear that we’re moving into a new environment of higher inflation and rates, it’s positive to see the mortgage market remaining resilient,” Emma Hollingworth, distribution director at MPowered Mortgages, said.

Read more: Interest rate hikes mean first-time buyers need to earn £12,250 more

Approvals for remortgaging increased to 48,400 in July, from 43,300 in June. This also remains below the 12-month pre-pandemic average up to February 2020 of 49,500, according to the latest Money and Credit statistics from the Bank of England.

Credit card borrowing grew by 13% in the 12 months to July, the fastest rise since October 2005, against a backdrop of the biggest overall rise in consumer borrowing since March 2019.

The annual growth rate for all consumer credit, which also includes overdrafts, personal loans and car finance, increased to 6.9% in July, which was the highest rate since March 2019 (7.2%).

Within this, the annual growth rate for credit card borrowing was 13.0%, while for other forms of consumer credit it was 4.5%, the Bank’s Money and Credit report said.

These were the highest rates since October 2005 (13.7%) and March 2020 (5.6%) respectively, it added.

“Vulnerable consumers living on a bare bones budget simply cannot make any further cuts to expenditure to weather escalating cost of living pressures – this is, in part, why we continue to see high levels of consumer debt," Myron Jobson, senior personal finance analyst at Interactive Investor, said.

“The annual growth rate of credit card borrowing has soared to its highest levels in 17 years amid the worst cost of living crisis in generations. July was a particularly agonising month for our back pockets, with inflation hitting double digits for the first time in 40 years. The cost-of-living crunch is set to go from bad to worst with the recently announced heightened energy price cap for October set to throw household budgets into disarray. Meanwhile, rises in food and petrol and other areas of expenditure is set to tighten the squeeze on households budgets," she added.

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