Fall in mortgage borrowing after mini-budget turmoil

Mortgage borrowing fell to its lowest level in nearly a year last month as the market turmoil after the government’s mini-budget caused a steep rise in borrowing costs, according to new data.

Credit figures from the Bank of England for October showed a 0.25 percentage point rise in the effective interest rate on new property loans, to 3.09 per cent. The total volume of mortgage borrowing fell to the lowest since November last year, at £4 billion, while the number of mortgage approvals dipped to 59,000, from 66,000 the previous month.

The mortgage market was temporarily in turmoil after the mini-budget delivered by Kwasi Kwarteng on September 23, with lenders having to withdraw hundreds of products due to a sharp rise in expectations that interest rates would go up.

Yields on government bonds have now broadly returned to levels in line with the UK’s counterparts and restored relative calm to the mortgage lending market, where interest rates have been steadily rising.

Simon Gammon, partner at Knight Frank Finance, said the turmoil led many buyers to postpone their purchases until the start of the new year.

“The positive news is things have settled down, but the market still feels very finely balanced,” he said. “The mini-budget weighed heavily on sentiment and it’s now clear many buyers have opted to postpone acting at least until the other side of Christmas. We’d expect activity to be subdued until 2023 while borrowers digest what is a ‘new normal’ for interest rates.”

The Bank’s figures showed that households were continuing to borrow on credit cards and other personal loans before the Christmas months and in the midst of a painful cost of living crisis.

Total consumer credit grew by £800 million last month, on top of a £600 million expansion in September. Half of the new borrowing was credit card loans and the other half was borrowing for cars and other personal finance.

The Bank of England has been raising interest rates this year at the fastest pace since the early 1990s, pushing up borrowing costs across the economy as the country heads for a winter recession. The average effective interest rate on a personal loan is now at the highest since 2018, rising 0.48 percentage points to 7.23 per cent.

Karim Haji, UK head of financial services at KPMG, said households were ramping up their savings to “build up a buffer ahead of anticipated tougher times”. Haji added: “People are also redirecting more of their disposable income to work costs, like transport, and essentials, like food, and they appear to be being cautious when it comes to discretionary and big-ticket spending.”