UK mortgage approvals drop more than expected amid high borrowing cost

Official data shows that UK mortgage approvals declined more than expected in the month of July, while consumers reduced borrowing.

The Bank of England announced on Wednesday that net mortgage approvals fell almost 10% from 54,600 to 49,400. The Bank of England said on Wednesday that the figure was below the 51,000 economists predicted in a Reuters survey and reversed a increase between May and July.

The number of approvals was 22 percent lower in July 2018 compared to July 2022, as rising borrowing costs affected prospective homebuyers. Data from the BoE showed that in July, average mortgage interest rates rose to 4.66 percent, which was the highest rate since 2008.

According to the BoE, overall consumer borrowing dropped to £1.2bn from £1.6bn, mainly due to car loans and personal loan, as households moved their money away from bank accounts that offered no interest to seek higher returns.

Myron Jobon, an analyst with the investment platform Interactive Investor said that Wednesday’s figures showed that “the affordability barrier remains insurmountable” for many potential buyers, despite recent drops in inflation.

Ashley Webb of Capital Economics, a UK-based consultancy, said that the drag on bank lending from higher interest rates grew in July. The BoE’s efforts to curb stubbornly high inflation through raising interest rates (which have now reached a 15 year high of 5.25 percent after 14 consecutive increases from December 2021) are reflected in the larger than expected drop in mortgage applications.

Webb stated that the drag effect will intensify since the BoE Monetary Policy Committee is expected to raise rates another quarter-point to 5.5% in September.

The BoE data revealed a decline in the annual rate of growth for all consumer loans from 7.5% in June to 7.3% in July, as costs for overdrafts and credit cards rose dramatically in July.

The interest rates on credit card rose 34 basis points from June to July, reaching a record high of 20,76%.

Gabriella Dickens is an economist with Pantheon Macroeconomics. She said that consumers “were less willing to increase spending in July by borrowing”, even though the consumer credit stock remained below the pre-pandemic level.

The BoE recorded a net transfer of £10.1bn to interest-bearing, fixed-term, higher-rate accounts. This is up from £6.5bn, in June.

The net flows into Individual Savings Accounts (ISAs) increased from £2.9bn to £4.3bn during July.

In contrast, households withdrawn a net £800mn (£700mn) from instant-access accounts with zero interest, after net inflows totalling £4.2bn (£4.2bn) in June.

According to the central bank, interest rates for instant-access accounts were 1.66 percent on average. Fixed-term accounts had an interest rate of 2.94 percent.

In July, households added an additional £400mn to their deposits at banks and building societies, down from £3.8bn deposited in June, and below the six month average of £600mn.

Webb suggested that the drop could be a sign of “stretching” household finances. He said that he expects the BoE will keep interest rates at high levels until the second half 2024, and for economic activity and bank lending to “weaken” further this year.