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UK mortgage approvals fall more than expected amid high borrowing costs

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UK mortgage approvals fell more than expected in July while consumers cut borrowing, according to official data that showed the impact of higher interest rates on credit.

Net mortgage approvals dropped almost 10 per cent from 54,600 in June to 49,400 in July, the Bank of England said on Wednesday. The figure was well below the 51,000 forecast by economists in a Reuters poll and reversed a jump registered between May and June.

Approvals were 22 per cent lower last month compared with July 2022 as higher borrowing costs hit prospective homebuyers. The average interest rate on new mortgages rose to 4.66 per cent in July, the highest since 2008, BoE data showed.

Overall consumer borrowing fell to £1.2bn in July from £1.6bn in June, driven by car loans and personal loans, and households moved money out of bank accounts offering no interest in search of higher returns, according to the BoE.

Myron Jobson, analyst at the investment platform Interactive Investor, said Wednesday’s data showed “the affordability hurdle remains insurmountable for many prospective buyers despite recent falls in inflation”.

“The drag from higher interest rates on bank lending grew further in July,” said Ashley Webb, UK economist at the consultancy Capital Economics.

Line chart of ‘000 showing UK mortgage approvals fell more than expected in July

The bigger than expected fall in mortgage approvals reflects efforts by the BoE to tame stubbornly high inflation by raising interest rates, which have reached a 15-year high of 5.25 per cent after 14 consecutive increases since December 2021.

Webb said the drag effect would intensify, since the BoE’s Monetary Policy Committee was expected to lift rates by another quarter point to 5.5 per cent in September.

The BoE data showed a decrease in the annual growth rate for all consumer credit from 7.5 per cent in June to 7.3 per cent in July as the costs of overdrafts, credit cards and personal loans rose sharply in July.

Interest rates on credit cards jumped 34 basis points between June and July, hitting a new record of 20.76 per cent.

Gabriella Dickens, economist at the consultancy Pantheon Macroeconomics, said consumers were “less willing to ramp up spending by borrowing in July”, even if the stock of consumer credit remained well below pre-pandemic levels.

Households also moved money in search of higher returns, with the BoE recording a net flow of £10.1bn into interest-bearing fixed-term accounts, which pay higher rates, up from £6.5bn in June.

Net flows into individual saving accounts (Isas) increased to £4.3bn in July, from £2.9bn in June.

By contrast, households withdrew a net £800mn from zero-interest instant access accounts, following net inflows of £4.2bn in June.

The central bank’s figures showed that the average interest rate for existing instant access accounts was 1.66 per cent, compared with 2.94 per cent for fixed-term accounts.

Overall, households deposited an additional £400mn with banks and building societies in July, down from £3.8bn in June and below the six-month average of £600mn.

Webb said the decline could indicate that households’ finances were becoming “more stretched”. He added that he expected the BoE to keep interest rates high until the second half of 2024 and for bank lending and economic activity to “weaken further this year”.

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