Mortgage approvals and consumer lending fall as inflation bites

Mortgage approvals and consumer lending fall as inflation bites

As households across the UK became more cautious about rising borrowing costs and soaring prices, there was a sharp drop in mortgage approvals and lending last month. This is according to data released by the Bank of England, which shows mortgage approvals fell to 66,800 in September from 74,440 in August. However, net mortgage borrowing remained stable, at £6.1 billion.

The data suggests that the property market was cooling before the disastrous mini-budget under the Truss administration. Delivered by the former chancellor, Kwasi Kwarteng, the budget resulted in turmoil in the financial markets and led to many home loans being withdrawn by lenders due to increased economic uncertainty.

Inflation soared to over 10% in September, and many households are now struggling to make ends meet financially. As the nation battles to cope with inflation, mortgage affordability has also fallen. In addition, rising borrowing costs due to interest rate hikes have also had a considerable impact on affordability among those hoping to get onto the property ladder.

mortgage rate

Figures also showed a sharp drop in consumer lending in September compared to August, down to £700 million from £1.2 billion in August, and reflected the lowest level since last December.

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The data also revealed a sharp increase in the amount households have added to their savings, suggesting people are doing their best to put money aside to get them through what is sure to be a difficult period ahead.

Approvals higher than expected

Despite the sharp drop in mortgage approvals between August and September, the figure was higher than many analysts had expected. This is partly down to the eagerness of buyers to lock in mortgage deals before interest rates increase further.

mortgage rate

It is widely expected the Bank of England will increase the base rate by a further 0.75% later this week. While this is lower than the 1% increase predicted several weeks ago, it will still have a significant impact on mortgage affordability for those looking to buy a home and will have a severe negative effect on the finances of existing mortgage holders with variable-rate loans.

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According to Daniel Mahoney, an economist at Handelsbanken, the level of mortgage approvals “was not due to any underlying strength in the housing market, but more to do with households seeking to get in ahead of rapidly rising mortgage rates”.

Interest rates on new mortgages increased in September

The data also showed that the interest rate on new mortgage borrowing increased by 29 basis points in September, rising to 2.84%. This reflected the most significant monthly rise since the central bank began increasing the base rate in December last year.

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However, it has also been revealed that some lenders have reduced their rates slightly due to decreased fears over the UK’s economy following Rishi Sunak becoming Prime Minister. However, despite these cuts, borrowing costs are still set to remain much higher than in recent times.