Rise in consumer credit signals revival in spending

1st March 2024

Latest data from the Bank of England has shown that consumer credit rose more than expected to £1.9 billion in January, up 8.9% from £1.3 billion on the previous month, adding to signs of a revival in spending. 

The data also shows a rise in mortgage approvals, rising to their highest level for 15 months in January as borrowing costs fell. Mortgage rates have fallen from their summer peak but persistent services inflation and strong wage growth data in February prompted some lenders to reverse cuts to borrowing costs.

Individuals repaid, on net, £1.1 billion of mortgage debt in January compared to £0.9 billion in December. Net mortgage approvals for house purchases rose from 51,506 in December to 55,227 in January. Net approvals for remortgaging remained stable at 30,900 in January up 7.2% month on month and 40.2% up year on year (Jan 2023 figure was 39,382). January marks the fourth consecutive increase and approvals are now at their highest level since June 2023 (53,953).

Richard Lane, Chief Client Officer at StepChange Debt Charity, said “Borrowing to pay for food, energy, clothing and other life essentials has sadly becoming a reality for so many people over the past few years, and that’s among not just low but middle-income households. While some may think we’re coming out of this crisis, our recent polling found that around 22 million people expect their finances to get worse over the next twelve months.

“Using credit for essentials is simply unsustainable and it’s a driver of problem debt that we see all too often. In what will possibly be their final fiscal event before a general election, the Government must commit to further support for financially vulnerable households in the Spring Budget next week. The end of cost of living payments and the Household Support Fund (HSF), is causing real concern for those facing financial hardship. We need to see the HSF extended for at least a year, alongside support for those grappling with unmanageable energy arrears.”

Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown said “The light is shining more brightly at the end of what’s been a long and difficult tunnel for consumers and companies. This era of high interest rates has been punishing, pushing down spending and freezing up the housing market, but pressures finally seem to be easing.

“With mortgage approvals rising in January, demand for consumer credit increasing more strongly, and cash deposits in bank accounts rising sharply, it reflects the findings of the HL Savings & Resilience Barometer, that cost-of-living pressures are easing for many higher-earning households.  Although the UK fell into recession last year, this latest snapshot bolsters the view that it will be a super-mild one. However, this data isn’t going to move the dial too much in terms of interest rate expectations. Policymakers will still be eager for more data indicating whether the rate of wage growth is pushing lower before they’ll be more confident to fire the starting gun on rate cuts.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Momentum was moving in the right direction for the mortgage market, with another pick-up in approvals in January – pushing them over 55,000. It’s brilliant news for sellers, who are finally seeing more buyers come back to the market.

“Falling mortgage rates played a major part in reinvigorating the market. At the end of January, the average 2-year fixed rate mortgage was just a fraction over 5.5%, according to Moneyfacts, down from just over 6% at the start of December and almost 7% in August. However, sellers might not want to start planning their celebrations too soon, because the picture has changed a little since. Sticky inflation persuaded the mortgage market it was getting a bit carried away, so banks started to factor in for Bank of England rate cuts to come slightly later and more slowly. As a result, mortgage rates have risen very slightly since. It’s not a dramatic move, and the average two-year fixed rate today is only 5.75%, but it may be enough to give some buyers pause.

“The latest Zoopla figures show that despite a real bump in buyers and agreed sales, it’s still a buyers’ market. More sellers than usual are still having to agree to discounts to shift their homes. The market can’t completely shake off the fact the economy has been in recession, and although it’s expected to emerge relatively quickly, stagnation remains firmly on the cards. It means we can enjoy the bump, and some sellers can celebrate being able to finally move on – but we’re not out of the woods just yet.”

Paul Heywood, Chief Data & Analytics Officer at Equifax UK said “Despite today’s Money and Credit figures showing a return to ‘business as usual’, rumours of 99% mortgages in the Spring Budget have the potential to supercharge the housing market. However, concerns abound over the impact this could have on mortgage rates, which have slowly crept up in the last few weeks.

“Since last year, we’ve moved from a period of mortgage ‘shock’, as homeowners came off low-interest rates, to mortgage paralysis as perpetually high rates have kept net approvals below pre-pandemic levels. Whilst there aren’t widespread signs of affordability distress, Equifax mortgage data has begun to show the direct impacts of elevated interest rates on homeowners, with the number of mortgages in arrears now having increased in 13 consecutive months.

“No matter the outcome of the Budget, Equifax and our lending partners are working continuously to provide the support and advice that our customers need to live their financial best and access the credit they need.”

Karim Haji, Head of Financial Services at KPMG said “While the rise in mortgage approvals offers some green shoots of hope for recovery, the housing market remains weak. With interest rates still relatively high, affordability will remain stretched and households with fixed-rate mortgage deals coming to end in early 2024 will feel the sting of refinancing at higher rates.

“While market consensus suggests rates will fall over time, in the short term there remains significant volatility which could act as a drag to the recovery of the housing market. For example, the recent uptick in market interest rates has seen several mortgage providers adjust rates up for the first time in many months.

“Many potential buyers face a difficult decision – with an ever-changing external environment they may want to lock in rates now before any potential rate volatility. However, the BoE is expected to start cutting rates later this year and buyers may prefer to wait it out.

“The uptick in consumer borrowing could point to households using disposable income to cover Christmas but then turning to credit to tide them over the longer month of January. Households will be looking to the Bank of England and the Budget for a cost-of-living lifeline. And with credit defaults expected to rise further, lenders must ensure customers have the right support to weather the months ahead.”