UK Consumer Credit Surges as Mortgage Lending Falls

Recent data from the Bank of England has revealed contrasting trends in UK borrowing, with a surge in consumer credit and a decline in mortgage lending.

Consumer Confidence on the Rise

In May, consumer credit borrowing experienced a significant rebound, increasing to £1.5 billion from £800 million in April. This rise includes various borrowing methods such as credit cards, personal loans, and car finance. The month-on-month increase suggests that consumers are more inclined to use credit for their spending needs, particularly with the approach of summer holidays. This trend could indicate a rise in consumer confidence or a reliance on credit to manage higher living costs. According to a report by the UK’s Office for National Statistics, consumer spending accounts for a significant portion of the UK’s GDP.

Summer spending habits

Mortgage Approvals and Lending Dip

Conversely, mortgage lending saw a notable decline. Mortgage approvals for house purchases dropped to 60,000 in May, down from 60,800 in April. This decline is accompanied by a halving in the total amount of money borrowed for mortgages, which fell from £2.2 billion in April to £1.2 billion in May. This trend may reflect ongoing affordability issues and caution among potential buyers. High borrowing costs continue to pose challenges for buyers, despite inflation easing.

Mortgage lending decline

Influences on Borrowing and Economic Behavior

Interest Rates and Market Conditions

High borrowing costs, coupled with dashed hopes for interest rate cuts throughout 2024, are likely influencing borrowing behaviors. The anticipation of the next interest rate decision in August is keeping buyers and those looking to refinance on edge. Current rates stand at a 16-year high of 5.25%, and even a potential 25 basis point cut would keep them above long-term averages. The Bank of England’s interest rate decisions have a significant impact on the UK economy.

Political and Economic Uncertainty

Political uncertainty ahead of the General Election is also causing delays in housing market activity. Potential buyers may be waiting for the outcome before making significant financial commitments. The UK’s political landscape is constantly evolving.

Consumer Spending Patterns

The rise in consumer borrowing could also be attributed to increased spending in anticipation of summer holidays, as well as general inflation pressures. However, lenders must monitor this closely, as higher borrowing at elevated rates, amid still high living costs, warrants vigilance.

Household Savings Trends

In addition to these borrowing trends, household savings saw a substantial increase. Deposits with banks and building societies grew by £5.3 billion in May. Notably, £4.2 billion flowed into Individual Savings Accounts (ISAs), likely driven by the start of the new tax year in April. This trend reflects a strategic shift among savers, who are moving funds from taxable savings accounts to tax-free ISAs. ISAs are a popular savings option in the UK.

Conclusion

The latest figures underscore the complexity of the UK’s financial landscape, with consumer credit borrowing rising sharply as opposed to mortgage lending which faces a slight downturn. Factors such as high interest rates, political uncertainty, and strategic financial decisions by households are shaping these divergent trends. As the economic environment continues to evolve, close attention to borrowing and saving behaviors will be essential for understanding the broader financial health of UK consumers.