Credit card spending rises by £700m

Latest data from the Bank of England show that spending on credit cards rose by £700 million in August as households borrowed heavily to cope with the cost of living crisis.

The increase pushed the annual growth rate in spending on credit cards to 12.9%, its joint highest level since 2005. Maintaining a high level of credit borrowing was also becoming more expensive after an increase in the average interest rate 18.66% in August, above the 18.55% seen before the pandemic. The annual growth rate for all consumer credit remained at 7.0% in August; the highest rate since March 2019 when it hit 7.2%. Credit card borrowing year-to-date is no £5.9 billion.

Consumers borrowed an additional £1.1 billion in consumer credit, on net, a little below the additional £1.5 billion borrowed in July.

Net borrowing of mortgage debt by individuals increased to £6.1 billion in August, up from £5.1 billion in July, and remaining above its 12-month pre-pandemic average up to February 2020 of £4.3 billion.

The figures also showed that mortgage approvals increased by 16% in August, showing that lenders approved 74,300 homebuyer loans. This compares to 63,700 in July and represents the highest number since the start of the year. It also reverses a series of declines recorded in the past few months. Approvals for re-mortgaging also increased to 49,400 in August, up from 48,400 in July.

Peter Tutton, Head of Policy, Research and Public Affairs at StepChange, said “The debt situation worsened in August, so the announcement of the energy price freeze was met with a degree of relief. However, it still leaves many households significantly more stretched than they were a year ago, and vulnerable to panic borrowing to try to fill the gap between their income and their essential spending. Now, financial market turmoil also opens up an increasing risk for mortgage holders, who in recent years have been far less likely than tenants to experience problem debt, but who will feel the brunt of any sharp rise in rates.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust said “The continued high level of borrowing is a clear sign of the growing challenges many households are facing.  Whilst the government’s capping of energy prices provides relief from future energy increases, millions of households are already struggling with rising costs across the board.”

“Our findings show that a fifth of UK adults are already behind on one or more bill and an increasing number are having to turn to credit to cover their essentials.”

“For those on the lowest income, who are feeling the impact of rising costs most severely, the choices are even more stark.  The government urgently needs to raise benefits to support those people who are being hit the hardest.”

Paul Heywood, Chief Data & Analytics Officer at Equifax said “The aftershocks from last week’s fiscal policy reforms continue to reverberate across the country. A pound in disarray, followed by strong rhetoric from the Bank of England on its monetary response, has caused a wave of lenders to step back from the mortgage market while they reassess their appetite for risk, making it more expensive for people to borrow money.”

“Mortgage lenders will of course be back, but with higher interest rates that pour cold water on the hopes of the thousands of house hunters rejoicing at last week’s Stamp Duty reforms. Now also begins a nail biting wait for the 600,000 households with fixed mortgages due to expire this year, and 1.8 million next year.”

“None of this will have been captured by today’s figures, which tell a story of rising demand for credit as the cost-of-living crisis continues to ravage household disposable income, but the trendline continues to move in the same direction. As borrowing costs increase, we can expect to see the total value of consumer borrowing continue to increase, although if the Bank of England succeeds in taking some heat out of the market, borrowing levels may fall in real terms.”

“The priority for everyone in the credit sector right now should be on affordability. On lending only to those that can afford to repay, and taking care of those that, by no fault of their own, now cannot.”

Richard Pike, Chief Sales and Marketing Officer at Phoebus Software said “The Bank of England figures are significant on their own but when put in the context of what has happened in the past week since the mini-budget, there were already warning signs.  Mortgage approvals increased enormously in August, but we need to hope those approvals got to offer stage before lenders pulled those rates in the past week, as many of the people who thought in August that their mortgage was sorted would now find that they had to pay two or three percentage points more than they were expecting.   Interest rates already rose 22 basis points in August but this pales into insignificance when looking at the 90bp that they rose in just one day at one point on Tuesday.”

“What the country is crying out for is for the government to produce a well costed, fiscally responsible budget that will steady the markets and reduce the need for such huge rate rises. We all have to hope that today’s meeting between the Prime Minister and the OBR can produce that and that the government will act before the end of November, or September’s stats will read in a way not seen since the credit crunch in 2007.”

Simon Webb, Managing Director – Capital Markets and Finance at LiveMore Capital said “While August’s figures are significant with the highest number of mortgage applications seen all year, the figures already seem out of date in perspective of the turmoil since the ‘mini-budget’ last Friday.  At their most positive, the Bank of England figures show that, despite the rising cost of living, the demand for mortgages and housing remains incredibly strong.  While the markets remain so volatile however, much of that demand will remain unfulfilled, and it will be interesting to see how big an impact September’s events have on the mortgage and property markets in the weeks and months to come.“

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown said “This could be a last hurrah for mortgage approvals for new buyers. August saw a big bounce back after months of decline, taking us to the heady levels we last saw in January this year. Buyers were holding up despite everything the market was throwing at them, but the latest twist in the mortgage tale could change the narrative dramatically.”

“The surge in August may owe a great deal to buyers who decided it was ‘now or never’ for a house purchase. If they wanted to buy, and get in before Christmas, they needed to secure a mortgage before rates rose again. They may be relieved they did so before chaos hit the mortgage market in September.”

“However, the movements in the market this week may mean this is the last boom in mortgage approvals for purchases for a while. At the moment, 40% of mortgages have been withdrawn from sale, and when they come back, rates will be much higher. Given how house prices have risen, and how much bills have soared, when all this is factored into mortgage affordability calculations, it could make it far harder to secure a mortgage.”

“Already, Nationwide figures out today show price rises stalled in September. If this is the beginning of a bigger slowdown, it may well mean that this is the last boom in mortgage approvals for house purchases for some time to come.”