Mortgage approvals in the UK rose to their highest level since October 2022 last month amid signs of a scramble to secure home loan deals before an expected surge in interest rates.
New data from the Bank of England revealed a surprise increase in demand for mortgages, with the increase from 51,100 in May to 54,700 in June confounding expectations in the financial markets of a fall to 49,000.
The Bank said there had also been an increase in remortgaging activity – which rose by 5,000 to 39,100 between May and June.
Despite June’s rise, mortgage approvals were still down by 15% year on year – and analysts said June’s pickup in demand was unlikely to be sustained.
Thomas Pugh, an economist at the audit, tax and consulting firm RSM UK, said: “The rise in mortgage approvals probably represents a scramble to secure a deal before cheaper mortgage products were pulled from the market in the wake of the surge in interest rate expectations at the end of May.
“With interest rates on mortgages continuing to rise, the average two-year fixed-rate mortgage deal broke above 6% in June, we expect the peak in house prices to fall by around 10% with the risk of bigger falls if the base rate rises above 6%.”
Threadneedle Street’s monetary policy committee will announce its latest interest-rate decision on Thursday and is expected to raise official borrowing costs – now at 5% – for a 14th consecutive time. On balance, financial markets think the Bank will opt for a quarter-point increase after the sharper-than-forecast fall in the annual inflation rate last month.
Simon Gammon, a managing partner at Knight Frank Finance, said: “June’s figures showed strong remortgaging activity and we’d expect another rise in July. Whereas in June, borrowers were scrambling to fix on fears that mortgage rates could rise further, July’s activity will be driven by a surge in demand for tracker products. Many more borrowers are now opting for trackers, betting that rates will keep easing and they will have the opportunity to fix at more attractive rates in a few months.”
The Bank said its “effective” interest rate – the actual interest rate paid – on newly drawn mortgages continued to exhibit “sustained increases”, having risen by a further 7 basis points, to 4.63% in June.
Andrew Wishart, senior property analyst at Capital Economics, said it would take time for higher home loans to dampen demand.
“It takes two to three months for developments in quoted mortgage rates to feed through to housing market activity. So, the tick up in mortgage approvals for house purchase reflects that mortgage rates were still coming down in April. Since then, our measure of the average quoted mortgage rate has risen from 4.3% to over 5.5%. We won’t see the full impact of that increase until we get the mortgage approvals data for September at the end of October.”
Wishart said he expected the number of approvals to drop to 40,000 a month, and had pencilled in a 30% drop between 2022 and 2023.