Mortgage borrowing saw rare monthly fall, while a summer of borrowing and spending failed to materialise

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the Bank of England publication of money and credit and interest rates, which show mortgage borrowing down in the month.

Key points – Mortgages:

• Net mortgage borrowing fell £1.4 billion in July. This has only happened once before in the previous decade. It follows record net new borrowing of £17.9 billion in June.
• However, the number of mortgages approved for home purchases (an indicator of future demand) was 75,200. This is down from 80,300 in June, but is higher than pre-pandemic levels.
• Mortgage rates continue to support the market. The average rate on all mortgages held is 1.05%, the lowest it has ever been. The rate on new mortgages averaged 1.83% – around the average since March 2020.

Key points – Borrowing:

• In July, overall consumer borrowing was level, with a rise of £0.1 billion in loans and car finance offset by the £0.1 billion repaid on credit cards. In a typical month before the pandemic, we were borrowing £1.2 billion more each month. Credit card borrowing is down 8.1% in a year.

Key points – Saving:

• We saved £7.1 billion. This is down from the April-June average of £8.8 billion, and the peak of £27.6 billion in May 2020, but it’s above the pre-pandemic average of £4.7 billion.
• The average interest rate on new fixed accounts fell to 0.29% – a historic low – while easy access held steady at 0.1% in July. But banks jostling for the top spot in August have brought more hope for savers.

Sarah Coles comments on Mortgages:

“Mortgage borrowing actually fell in July, which is rare enough to raise eyebrows, but not to spark panic among buyers and sellers. Fortunately for recent buyers, there are still signs of underlying strength in the property market, and record low mortgage rates don’t hurt either.

“It takes something spectacular for mortgage lending to fall. The last time it happened was back in April 2020, when the first lockdown effectively shut the housing market. This time, the stamp duty holiday caused a frenzy in June, which came to a shuddering halt in July.

“This isn’t an enormous shock. The stamp duty holiday encouraged people to bring their property purchases forward, so the market was always going to pause for breath when it ended. It’s just that after a marathon dash for the deadline, it has taken an unusually dramatic pause.

“There are plenty of signs of underlying strength in the market, driven by the fact that mortgage holders are paying record low rates, and there’s still demand from people wanting to change their lifestyle as a result of the pandemic. When you add in the fact we’re still seeing a real shortage of properties on the market, this should help support house prices. We may well see the rate of rises start to taper off. However, anyone who has bought during this frenzied period will be relieved to know that there’s no imminent sign of collapse.”

Borrowing:

“A summer of borrowing and spending failed to materialise in July, and our credit cards continued to gather dust. Credit was curtailed by a triple whammy of a new-found enthusiasm for saving, a bigger cushion of cash to fall back on, and the fact that in many cases it proved difficult to part with our cash.

“In some cases, spending money proved far harder than planned. Uncertainty over changing rules meant many people felt they couldn’t book an overseas holiday, while lack of availability of accommodation in the UK convinced many to stay home. Meanwhile a shortage of computer chips meant there weren’t enough new cars to meet demand, putting the brakes on car financing. And the difficulty of getting builders and materials meant fewer loans for home improvements too.

“Millions of those who were able to splash the cash had their lockdown savings so they didn’t need to borrow. Meanwhile, millions of others chose to save instead: while the amount we put aside in savings fell back slightly, it remained well above pre-pandemic levels.”

Savings:

“Unfortunately, when it comes to rates, July was a miserable month for savers, with fixed term average rates hitting a horrible new low and easy access rates bumping along the bottom. Fortunately, August shone a bit more sunshine into the market, so next month’s figures should look altogether brighter.

“Banks jostling for position at the top of the market has eased the squeeze for those savers who are prepared to shop around. In the fixed rate market, banks have been competing for the top spot, and rates have risen. It has opened up the gap between easy access and fixed rates so that we’re finally seeing more savers seriously consider tying their savings up for a better deal. Right now you can get 1.41% if you fix for a year and 1.7% by fixing for two.

“Both are below the current rate of inflation: you can’t currently beat inflation in an ordinary savings account. However, that doesn’t mean we should shrug our shoulders and resign ourselves to the measly rates on offer from so many of the high street banks. With the high street banking giants offering typical easy access rates of 0.01%, we can get 170 times the interest by fixing in a competitive account.

“However, if you want to take advantage, you’ll need to act fast to get the very best rates. Many of the best rates are from newer, smaller banks, who aren’t looking for enormous sums of cash from savers. It means many of these will be blink-and-you’ll-miss-them deals.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay