Borrowing activity spiked in August
Borrowing activity spiked in August, just one month before the Chancellor’s mini-budget upended the mortgage lending market.
According to the latest Bank of England Money and Credit statistics, net borrowing of mortgage debt increased to £6.1bn in August – up from £5.1bn in July. Meanwhile, consumers borrowed another £1.1bn in consumer credit, which is above the pre-pandemic monthly average of £1bn.
There was a sharp increase in the number of mortgage approvals, with 74,300 facilities agreed in August, up from 63,700 in July. This is the highest level since January 2022, when 74,500 mortgage approvals were counted.
However, since Chancellor Kwasi Kwarteng’s mini-budget on 23 September, more than 1,000 mortgage products have been pulled by lenders in response to fears of an imminent recession and rising base rate.
“The aftershocks from last week’s fiscal policy reforms continue to reverberate across the country,” said Paul Heywood, chief data and analytics officer at Equifax UK.
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“A pound in disarray, followed by strong rhetoric from the Bank of England on its monetary response, has caused a wave of lenders to step back from the mortgage market while they reassess their appetite for risk, making it more expensive for people to borrow money.
“The priority for everyone in the credit sector right now should be on affordability. On lending only to those that can afford to repay, and taking care of those that, by no fault of their own, now cannot.”
Alice Haine, personal finance analyst at DIY investment platform Bestinvest said that the sharp jump in mortgage borrowing in August and corresponding rise in mortgage approvals “is a sharp contrast to the chaos currently engulfing Britain’s property market.”
“Kwarteng’s decision to push ahead with a raft of tax cuts expected to be funded in large part by extra borrowing, including cuts to basic rate income tax and stamp duty, as well as scrapping the 45p additional rate of income tax, spooked the financial markets and raised fears that the Bank of England would have to increase the base rate as high as six per cent next year to counteract the inflationary effects of his radical fiscal plan,” Haine said.
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“With interest rates already at 2.25 per cent and expected to jump significantly over the coming months, chatter of a mortgage time bomb is getting louder as those on fixed-rate deals expiring soon could now see huge sums added to their monthly repayments when they come to renew.”
Haine warned that the cost of living crisis could seem more households turning to credit to keep their finances afloat, which could lead to a debt crisis.
“Households should scrutinise household budgets carefully, stripping out any unnecessary spending to ensure they can not only meet their everyday bills but also be prepared for higher mortgage payments if they are remortgaging soon,” she advised.
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