Net mortgage borrowing has decreased for a consecutive month, as experts say the market is “rife with nerves” due to a combination of low stock and unfavourable economic conditions.
The latest monthly money and credit figures released today (Aug 30) by the Bank of England show that net mortgage borrowing has decreased slightly to £5.1bn in July, down from £5.3bn in June.
While borrowing remains above the pre-pandemic average of £4.3bn in the 12 months up to February 2020, it has seen almost a £3bn drop since May.
Knight Frank partner, Hina Bhudia said the figures show that “rising rates, economic headwinds and stubbornly low stock levels” are weighing on activity.
Bhudia noted that lenders’ have slowed the repricing of products, giving borrowers more time to consider their options but she warned that with more rate hikes around the corner, this could be a temporary lull.
"The market is rife with nerves. We're getting large numbers of calls from borrowers with mortgages soon up for renewal that are worried about their mortgage payments,” Bhudia said.
“These are often people that locked in two-year fixes of between 1.2 per cent and 1.8 per cent a couple of years ago and are now facing fixed rates of anywhere between 3.2 per cent and 3.5 per cent. That's a huge jump for most people and will be equivalent to hundreds of pounds a month in extra costs on average loan sizes."
Bestinvest’s personal finance analyst, Alice Haine agreed that the cost-of-living crisis and rising interest rates has had a cooling effect on the mortgage market.
Despite the drop in net borrowing, approvals for house purchases - an indicator of future borrowing - increased slightly to 63,800 in July, from 63,200 in June.
However, this remains below the 12-month pre-pandemic average up to February 2020 of 66,800.
Haine pointed out that this slight increase may be a sign that buyers are pushing through purchases before interest rates rise any further.
“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," she said.
“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 per cent by next May from 1.75 per cent today, 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?”
Haine also commented that a downturn in the housing market now seems “increasingly likely”.
“While there are some expectations house prices will fall 4 per cent in 2023, others predict drops of up to 10 per cent by the end of 2024,” she said.
“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.”
Consumers lean heavily on credit
Meanwhile, individuals borrowed an additional £1.4bn in consumer credit in July, following £1.8bn of borrowing in June.
This was above the 12-month pre-pandemic average up to February 2020 of £1bn.
The additional consumer credit borrowing in July was split between £700mn on credit cards, and £700mn through other forms of consumer credit (such as car dealership finance and personal loans).
The rise in consumer credit borrowing illustrates how strained people’s finances are now becoming according to Haine.
“This is not the time to be spending beyond your means,” Haine said.
“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.”
jane.matthews@ft.com
