Consumer borrowing reaches a five-year high, as inflation reduces earnings

Last month, families took on more debt than they had since 2018. Rising costs have put increasing pressure on household finances.

According to the Bank of England consumer credit increased by PS1.7bn in a single month as consumers re-financed their debts after paying off their accounts during the pandemic.

Consumer debt is £215bn for households, of which £66bn  are on credit cards, and £149bn in other debts such as overdrafts or hire purchase agreements.

The Covid low was below £197bn (in April 2021), but the peak pre-pandemic of £225bn has not yet been reached.

This comes after inflation hit workers’ purchasing power with prices rising faster than average wage growth. Although the rate of inflation has dropped, it was 7.9pc at the end of June. This is almost four times higher than Bank of England’s 2pc goal.

Ashley Webb, Capital Economics, said that extra borrowing is likely to be temporary.

He said that, “[Higher borrowing] along with the warmer than usual weather probably supported the large 0.7pc increase month-on-month in retail sales volume in June.

We doubt that this trend will continue, as households could cut back on spending and borrowing as higher interest rates increase the pressure. This would lead to a mild recession in later this year.”

The housing market is showing higher interest rates. In June, the average rate that a buyer paid was above 4.6pc. This was the highest since 2008.

Bank of England reported that the average new loan for a two-year fixed rate was 4.7pc. Those who chose a mortgage of five years paid an average of only 4.3pc.

The number of mortgages for home purchase has increased from May’s 51,100 to June’s 54,700. This is the highest number since October 2022 when the financial markets were roiled by the mini-Budget meltdown.

Thomas Pugh of RSM said that it is more a final hurrah than an indication of strength.

He said: “The increase in mortgage approvals is probably a scramble for a deal to be secured before cheaper mortgage products are pulled off the market as a result of the surge of interest rate expectations towards the end of May.”

Savings can benefit from the rising interest rates if you are willing to put your money in a safe place.

According to the Bank of England the average rate for a fixed-term account is now 4.3pc. This was up from 1.6pc just a year earlier. The typical instant access accounts pay just under 1.5pc as opposed to 0.2pc back in June 2022.

The gap between the mortgage rates and the long-term savings rates has shrunk dramatically since December 2021, when the Bank of England began to raise its base rate.

Since then, has increased from 0.1pc to 5pc . The gap between mortgage and term deposit rates has also been reduced from 1.2 to 0.3 percent.

The spread between instant access savings and mortgages has nearly doubled from 1.5 to 3.2 percent.

In April 2018, the consumer debt soared from £1.85bn to £1.9bn, as consumers increased their spending after the “beast of the east” winter cold snap that kept families inside in late February/early March.

The country was also in a debt frenzy as banks were confident and families were eager to borrow. This led the Bank of England, which is based in London, to warn of the “pockets of risks” that existed in the financial industry.