UK demand for mortgages slumps as interest rates deter buyers

Bank of England figures also reveal many households are dipping into savings, rather than using credit cards

Demand for mortgages has collapsed to its lowest level since the depths of the 2020 lockdown as potential homebuyers are deterred by rising interest rates, the latest official figures show.

The Bank of England said the number of home loan approvals had dropped to 35,600 in December from 46,200 in November – the fourth monthly fall in a row.

With the cost of borrowing increasing, Threadneedle Street said it was the lowest monthly total for mortgage approvals since May 2020 when the UK economy was affected by a near-blanket lockdown.

Excluding the pandemic and its immediate aftermath, the December total was the lowest since January 2009, a time when the economy was deep in recession in the wake of the global financial crisis.

The Bank said the effective interest rate – the actual borrowing cost – paid by newly drawn mortgages increased by 32 basis points to 3.67% in December, the largest monthly increase since December 2021, when Threadneedle Street’s nine-strong monetary policy committee began a series of nine consecutive increases in official rates.

A 10th increase – from 3.5% to 4% – is widely expected by the financial markets when the monetary policy committee announces its latest decision on Thursday.

Ashley Webb, a UK economist at Capital Economics, said the drag on housing market activity was likely to intensify over the next six months, because 75% of all outstanding mortgages were on fixed interest rates so “many existing borrowers have yet to feel the full effects of higher interest rates”.

The Bank’s money and credit figures also revealed that households have been dipping into their savings, rather than using credit cards, to support their spending during Britain’s cost of living crisis. Consumers paid off £500m of credit card debt, while the increase in cash held in bank accounts was £3.9bn in December compared with a rise of £5.7bn in November.

“Overall, the cumulative downward effect from higher interest rates appears to be starting to weigh more heavily on the economy. And given the large share of fixed-rate mortgages, this effect is only going to grow throughout this year,” Webb said.

Thomas Pugh, an economist at the leading audit, tax and consulting firm RSM UK, said: ‘The slump in consumer credit to £0.5bn in December suggests that after a period of resilience, consumer spending may have weakened at the end of the year. This raises the chances that the economy contracted in the fourth quarter and fell into recession.”


Larry Elliott

The GuardianTramp

Related Content

Article image
Bank of England interest rate rise – what it means for borrowers and savers
Rate rise to 3.5% affects everything from mortgages to credit cards, loans and savings. Here is all you need to know

Rupert Jones

15, Dec, 2022 @1:27 PM

Article image
How will the UK interest rate hike affect you?
From loans to mortgages, house prices to credit cards – all you need to know about the biggest rate rise since 1989

Rupert Jones

03, Nov, 2022 @1:49 PM

Article image
What does interest rate cut mean for mortgages and savers?
There will be gain for some consumers but pain for others after the Bank of England’s decision

Patrick Collinson

11, Mar, 2020 @10:52 AM

Article image
What would negative interest rates mean for mortgages and savings?
Variable-rate mortgages may fall a little, and it seems unlikely banks will charge to hold savings

Hilary Osborne

21, May, 2020 @2:40 PM

Article image
What does the Bank of England interest rate rise mean for you?
From mortgages to credit cards, we break down the impact the 4% rise could have on your finances

Zoe Wood

02, Feb, 2023 @2:01 PM

Article image
Mortgages, savings, pensions: is it all change for interest rates?

We look at whether interest rate movements behind the scenes are good or bad news for savers, those retiring, and people looking for a mortgage

Rupert Jones

29, Jun, 2013 @6:00 AM

Article image
Interest rates: UK borrowers are facing a serious reality check
Latest Bank of England rise offers little hope to generation of homebuyers weaned on ultra-cheap mortgages

Larry Elliott Economics editor

15, Dec, 2022 @12:49 PM

Article image
Interest rates likely to jump as markets await Bank of England decision
Analysts believe a 0.75 percentage point rise is likely, potentially the biggest hike in the base rate since 1989

Phillip Inman

03, Nov, 2022 @12:01 AM

Article image
UK homeowners still better off than renters despite spike in interest rates
Average monthly cost of owning 3-bed home is £500 a year less than renting, but the gap is narrowing

Julia Kollewe

15, Mar, 2023 @12:01 AM

Article image
Interest rates will need to rise again, warns Bank of England rate-setter
Catherine Mann, a hawkish member of the MPC, says high rates necessary to stop inflation becoming embedded in wages and prices

Phillip Inman and Graeme Wearden

23, Feb, 2023 @1:53 PM