Data from the Bank of England indicate a significant decline in mortgage approvals for June, which have dropped to a six-month low. This decrease underscores the continuing challenge for potential homebuyers posed by elevated borrowing costs.
According to the latest figures released by the Bank of England, the number of mortgage approvals fell to 59,976 in June, down from 60,134 in May. Although this figure remains above the 2023 monthly average of 48,000, it has fallen short of analysts’ expectations. The decline in approvals highlights the deterrent effect of high interest rates on potential homebuyers.
The report also notes that the effective interest rate on newly drawn mortgages rose slightly by three basis points to 4.82 per cent, while the rate for all mortgages increased to 3.65 per cent. This rise in interest rates has contributed to the hesitation among consumers about entering the housing market. Currently, the UK’s base interest rate stands at 5.25 per cent, marking a 16-year high. Financial markets suggest there is roughly an even chance that the Bank of England will lower this rate for the first time in four years on Thursday, a move that could encourage mortgage providers to reduce their rates as well.
Some high street lenders have already begun to anticipate such a rate cut. For instance, Nationwide, a prominent building society, offered mortgage products with rates below 4 per cent last week, the first instance of such rates since February. Rob Wood, Chief UK Economist at Pantheon Macroeconomics, expects the number of mortgage approvals to improve in the latter half of the year, potentially reaching 65,000, as mortgage interest rates fall in response to anticipated interest rate cuts from the Bank. Wood also noted a reduction in lump-sum mortgage repayments to £1.2 billion in June, the lowest figure since January 2016, suggesting a decrease in consumer anxiety about rising interest rates.
In June, gross lending reached £20.8 billion, surpassing the £18.7 billion in repayments for the same period. However, members of the Bank’s monetary policy committee have highlighted that services inflation remains persistently high, which may influence their decision to maintain current rates for an eighth consecutive meeting. Although services inflation slightly dipped to 5.7 per cent last month, it continues to be a point of concern.
Ashley Webb, UK Economist at Capital Economics, indicated that the steady rise in mortgage rates since February is likely to result in stagnant activity within the housing market and minimal changes in property prices for the remainder of the year. Data from the Office for National Statistics show that house prices increased by 2.2 per cent to £285,000 in the 12 months leading up to May.
Moreover, the cautious attitude towards borrowing is reflected in consumer behaviour. Credit card spending dropped to £500 million in June from £600 million in May, likely due to weaker retail sales, which fell by 1.2 per cent during that month. Consequently, overall consumer borrowing decreased to £1.2 billion, down from £1.5 billion in May, falling below analysts’ forecasts of £1.3 billion. Concurrently, households added £8.4 billion to their savings accounts in June, up from £6.5 billion the previous month, a trend that has constrained economic growth by reducing consumer spending.
The data from the Bank of England underscores the significant impact of high interest rates on the UK housing market, leading to a decrease in mortgage approvals and cautious consumer borrowing. Although there is hope that a reduction in the base interest rate could stimulate the market, persistent inflation in the services sector may complicate these expectations.
