UK mortgage approvals and consumer lending fall as rising prices bite

UK mortgage approvals fell last month and lending to consumers slowed sharply as households became more cautious about rising prices and borrowing costs, Bank of England data showed on Monday.

The central bank said mortgage approvals to fund house purchases totalled 66,800 in September, down from 74,440 the previous month, while net borrowing of mortgage debt remained steady at £6.1bn.

The figures point to a housing market that was slowing even before Liz Truss’s ill-fated “mini” Budget of September 23 sparked market turmoil that led lenders to withdraw home loans.

Meanwhile individuals borrowed an additional £700mn in consumer credit, down from £1.2bn in August and the lowest level since December 2021. At the same time, households added £8.9bn to their savings — double the pre-pandemic average — suggesting that many people are building up cash buffers to help them weather a difficult year ahead.

Mortgage approvals remained higher than analysts had expected, potentially reflecting a rush by some homebuyers to lock in mortgage offers they could afford before interest rates rose further.

Daniel Mahoney, economist at Handelsbanken, said the figures suggested that the strength of mortgage approvals until now “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”.

The BoE said the interest rate paid on newly drawn mortgages jumped by 29 basis points to 2.84 per cent in September. That was the biggest monthly increase since December 2021, when the Monetary Policy Committee first began raising its benchmark rate as inflationary pressures became apparent.

This “effective” interest rate is an average for the month; by the end of September, many mortgage providers had withdrawn products from the market or were charging more than 6 per cent.

Although some lenders have now started cutting rates as fears over the UK’s fiscal position ease, borrowing costs are set to remain much higher than in the recent past. Analysts expect the MPC to deliver a further 0.75 percentage point increase in the base rate in its next policy decision on Thursday.

The slowdown in consumer credit was driven entirely by lower credit card borrowing, which fell sharply from a net £700mn in August to £100mn in September, the BoE said.

Thomas Pugh, economist at the audit firm RSM, said this was “further evidence that the UK is already in recession”, with consumers reining in non-essential purchases to reduce their total spending despite the surge in prices of essentials.

Gabriella Dickens, economist at the consultancy Pantheon Macroeconomics, said the rise in savings could reflect homeowners preparing “to pay off a chunk of their mortgage when they come to refinance”, or boosting them in order to be able to cover bills for a set period amid higher food and energy costs.

But she noted that the rise in net saving across the economy hid stark inequalities. Separate data published last week by the Office for National Statistics showed that 30 per cent of households would now be unable to afford an unexpected but necessary expense of £850, up from 25 per cent at the end of last year.