Mortgage approvals drop and credit card borrowing jumps as financial challenges mount

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“November’s drop in mortgage approvals and remortgaging is no surprise when you consider the catalogue of challenges facing the property market - with higher borrowing costs, double-digit inflation and falling real wages impacting affordability for both first-time buyers and those looking to refinance.

“While net mortgage borrowing ticked up slightly, the decline in mortgage approvals - an indicator of future borrowing – followed the sharp drop seen in October when the calamitous effect of Kwasi Kwarteng’s disastrous mini budget really became evident, with buyers failing affordability checks or struggling to secure a mortgage at all after lenders pulled products at a rapid rate amid soaring borrowing expectations.

“Mortgage rates may have now stabilised from their October highs, but the pain is far from over for homeowners. While inflation is expected to ease over the course of 2023, this is because the Bank of England will continue its rate-hiking cycle to curb the runaway price rises seen over the past 18 months despite the UK entering a recession.

“This means interest rates are likely to jump from the current level of 3.5% to around 4.25% to 4.5%, which although high when compared to the past decade or so, is a slight improvement on the 6% or more expected in the wake of the Kwarteng mini-Budget.

“When interest rates go up, borrowing typically becomes more expensive, but with interest rates now expected to top out next year at a lower level than once feared, it means mortgage rates particularly on new products, might be near their peak and won’t jump much higher from here.

“This won’t be much comfort for the millions with fixed-rate deals expiring this year who now face a significant increase in costs of £250 per month on average when they remortgage, according to the BoE, at a time when their finances are still being squeezed by the cost-of-living crisis.

“Those looking to upsize may put their plans on pause for now while first-time buyers may have to downgrade what they buy as they simply cannot afford as much as they could a year ago. There will be a cross-over to the rental market as buy-to-let landlords try to pass on the costs to tenants, with some landlords potentially forced to sell up as higher mortgage rates decimate their profit margins. The knock-on effect of all of this is falling property prices, with December recording the fourth consecutive monthly price fall, according to the latest Nationwide House Price Index – the worst run since 2008, with prices now 2.5% lower than their August peak.

“How far prices will drop over the course of 2023 is uncertain, but with more mortgage products now available and property values on the retreat, buyers that can afford to proceed may find more scope for negotiation. The era of ultra-low interest rates may be over but for those with a decent deposit, a stable job and a good broker, 2023 could deliver a better deal than hoped if they shop around and bargain hard. In such an uncertain environment, however, first-time buyers should avoid stretching their finances to the max to give themselves some wiggle room in case their circumstances change.”

Alice Haine says: “Inflation may have eased from its 11.1% October peak, but it is still in double-digit territory and with interest rates set to rise in the coming months and the cost-of-living crisis still very much with us, household budgets will be tested to the max in 2023.

“It’s no surprise then to see consumers increasingly turning to credit to fund rising living costs, despite the higher cost of borrowing, as they also contend with diminishing tax allowances, falling real incomes and a recession.

“While some households are successfully reining in expenditure to ensure they can pay their bills, the sharp rise in credit card borrowing shows that others are seeking quick fixes to fill gaps in their income with November often a higher spending month as households buy more in the preparation for Christmas.

“Food inflation alone jumped 16.5% in the 12 months to November, according to the Office for National Statistics – the 16^th consecutive monthly rise and the highest level since September 1977 when it was estimated to be 17.6%. Meanwhile retail sales volumes dropped 0.4% in November despite Black Friday deals and the start of the men’s football World Cup as consumers tightened their belts.

“The likelihood is that borrowing will have jumped again in December as households struggling with the cost-of-living crisis take on debt to fund Christmas. For those that did turn to credit card debt over the festive period, this is not a time to panic. While, ideally, credit cards should be the last resort for those looking to balance the books, they can be a cost-effective short-term borrowing option if a consumer signs up for 0% balance transfer or spending card.

“These offer a set term where no interest is applied on a balance transfer or new purchases - reducing the cost of that credit and the risk of debts compounding out of control. Remember, a balance transfer fee is likely to be applied to the amount you transfer so only use this credit option if you cannot clear the balance for several months and don’t forget these types of cards are only cost-effective if you pay them off before the 0% term expires.

“With the UK expected to start 2023 in a recession, now is the time to take control of the household budget to ensure your finances not only survive January but the full 12 months of the year. Yes, 2023 will undoubtedly be difficult, but setting a solid budget now that strives to pay down debt, build up savings and ensures you live within your means could be the recipe for success.”

Alice Haine says: “Rapidly improving savings rates in the last few months of 2022 offered some good news for savers with rates hitting highs not seen in well over a decade. However, with double-digit inflation still with us, returns are still deeply negative in real terms.

“Despite negative returns, households added £5.7 billion to their savings in November – a slightly lower figure than October - as they reduced their spending and boosted their precautionary savings to prepare for the financial challenges ahead, such as higher mortgage costs.

“With the BoE’s base rate now sitting at 3.5% - the highest level since November 2008 - and likely to go up from here, some savers may be waiting for better offers. But with interest rate expectations much lower than they were in the wake of Kwarteng’s mini budget, it could mean savings rates have already peaked. But keep an eye out for deals as regular savings accounts now top 7%, easy-access accounts 2.86% and fixed rates 4.6%.

“For those whose savings are sitting in accounts with dismally low returns such as 0.5%, or worse 0.1% – a hangover from the era of ultra-low interest rates – now would be the time to secure a better deal. But don’t forget that high inflation of 10.7% will still eat away at your returns.

“While saving money in an easy-access account makes perfect sense for an emergency pot of cash to cover unexpected expenses, it is not the ideal option for larger sums that won’t need to be touched for years. Up to £20,000 can be stored in a tax wrapper such as an Individual Savings Account, which offers tax-free returns on savings and investments – something people need to take advantage of before the tax year ends at midnight on April 5.

“Sums in addition to that could be deposited in a workplace or personal pension which comes with the gift of free cash in the form of tax relief. This is automatically granted on taxpayers’ pension contributions at 20% of the amount going in, while higher rate taxpayers can claim back an extra 20% of the sum deposited – giving your pension pot an instant inflation-beating boost. With record numbers of people being drawn into the higher rates of tax as a result of frozen tax thresholds, investing in a pension is a compelling and legitimate way to reduce a high tax liability.”