Credit card spending and personal loan borrowing increases

Credit card spending and personal loan borrowing both increased in the first quarter of 2022, returning to pre-Covid trends as the last restrictions were ended according to new analysis by UK Finance.

Total credit card spending was £50.4 billion, with March seeing the second highest spending since the pandemic. There was a significant increase in credit card spending on travel as international holiday bookings took off.

Following sharp falls during the pandemic, outstanding credit card balances were broadly static over the quarter at £56 billion. There were £4.7 billion of new personal loans made by high street banks in the first quarter.

The growth in savings eased, following substantial rises through 2020 and 2021. In total, there is £1.1 trillion held in savings accounts, of which 84 per cent is in instant access accounts.

Overdraft usage rose during the first quarter but remains below pre-pandemic norms. Total overdraft debt of c.£5.5 billion is around 15 per cent below the amount seen in 2019.

In order to assess the potential impact of cost pressures coming this year, UK Finance analysis looked at the impact of recent tax changes and inflation.

The analysis found the average mortgaged household will see a three per cent reduction in the amount of disposable income left over after mortgage, credit commitments and living costs. However, the cost-of-living squeeze will be felt most acutely in lower-income brackets, which have around half the spare income of those in higher brackets, even before cost-of-living pressures are factored in.

The research found that most borrowers across all income brackets would still qualify for the same sized mortgage now as they did last year. However, there will be some borrowers who would not qualify for the size of loan granted last year due to the new additional costs, which may result in a softening of demand for mortgages this year.

The number of people moving home dropped 42 per cent compared to the first quarter of 2021 and the number of first-time buyers (FTBs) was down by 12 per cent.

Whilst it was expected that mortgage activity would be strong through this year, this will largely be driven by customers coming to the end of their fixed rate deals and looking to switch to a better rate. This contrasts with previous years when a significant element of remortgaging activity involved borrowing substantial sums of additional money, in many cases to fund further property purchases.

Although there was a decrease in home movers and first-time buyers compared to the unprecedented highs of last year, numbers remain slightly above 2019 levels as the ongoing effect of the pandemic drives demand for more space.

Eric Leenders, Managing Director of Personal Finance at UK Finance, said “During the first quarter of 2022 we saw the spread of the Omicron variant of Covid and consumer prices beginning to rise, although this did not translate to any drop off in spending or mortgage borrowing.”

“However, we know that some people, particularly those on lower incomes, will already be feeling the strain. There are significant additional pressures on household finances in the second quarter, most notably from energy price rises and tax changes. Our analysis shows that this year there will be a three per cent fall in disposable incomes for the average mortgaged household, which may result in more subdued spending and borrowing.”

“Any customers worried about meeting their loan payments should speak to their lender early to discuss the tailored support available to them. Lenders won’t put customers on a plan that they can’t afford.”

Krishnapriya Banerjee, Managing Director in Accenture’s UK banking practice, said “While the first quarter painted a fairly stable picture of the UK’s household finances, further potential interest rate hikes and energy price booms mean the full effects of the soaring cost of living have yet to bite into household budgets. Although many banks have started making provisions to support their most vulnerable customers, they also need to focus on communicating their empathy for consumers affected by this crisis. Banks need to strike the perfect balance of delivering digital services and human-centric banking to help customers navigate this challenging situation.”

John Phillips, National Operations Director, Just Mortgages said:“This report confirms a stable start to the year with application activity similar to pre-covid levels and feedback from our brokers around the country confirms that re-mortgaging remains strong.”

“However, what these figures don’t yet show is the recent shake-up in household budgets with interest rates, fuel, energy, and food costs all rising steeply and eating away at take home pay especially for lower-income families and typically first time buyers. The chancellor has warned that interest rates are expected to rise to 2.5% by the end of the year and with the cost of living rising rapidly, complying with affordability conditions will become increasingly difficult. Our brokers tell us that competition for houses remains very high and borrowers key concern is securing a mortgage offer and having the ability to proceed when they find the house they want.”

“In the remaining half of 2022, mortgage demand should remain strong as borrowers look to secure a competitive purchase or re-mortgage deal before inevitable rate rises and with reducing housing stock the speed of offer could overtake rate as the most important factor to borrowers. Professional mortgage advice looks set to be more important in 2022 than for many years previously.”

Affordability position of borrowers in 2021: