UK demand for mortgages slumps as interest rates deter buyers

Demand for mortgages has collapsed to its lowest level since the depths of the 2020 lockdown as potential homebuyers are deterred by rising interest rates, the latest official figures show.

The Bank of England said the number of home loan approvals had dropped to 35,600 in December from 46,200 in November – the fourth monthly fall in a row.

With the cost of borrowing increasing, Threadneedle Street said it was the lowest monthly total for mortgage approvals since May 2020 when the UK economy was affected by a near-blanket lockdown.

Related: Why UK house prices could plunge by 20% after the latest interest rate hike

Excluding the pandemic and its immediate aftermath, the December total was the lowest since January 2009, a time when the economy was deep in recession in the wake of the global financial crisis.

The Bank said the effective interest rate – the actual borrowing cost – paid by newly drawn mortgages increased by 32 basis points to 3.67% in December, the largest monthly increase since December 2021, when Threadneedle Street’s nine-strong monetary policy committee began a series of nine consecutive increases in official rates.

A 10th increase – from 3.5% to 4% – is widely expected by the financial markets when the monetary policy committee announces its latest decision on Thursday.

Ashley Webb, a UK economist at Capital Economics, said the drag on housing market activity was likely to intensify over the next six months, because 75% of all outstanding mortgages were on fixed interest rates so “many existing borrowers have yet to feel the full effects of higher interest rates”.

The Bank’s money and credit figures also revealed that households have been dipping into their savings, rather than using credit cards, to support their spending during Britain’s cost of living crisis. Consumers paid off £500m of credit card debt, while the increase in cash held in bank accounts was £3.9bn in December compared with a rise of £5.7bn in November.

“Overall, the cumulative downward effect from higher interest rates appears to be starting to weigh more heavily on the economy. And given the large share of fixed-rate mortgages, this effect is only going to grow throughout this year,” Webb said.

Thomas Pugh, an economist at the leading audit, tax and consulting firm RSM UK, said: ‘The slump in consumer credit to £0.5bn in December suggests that after a period of resilience, consumer spending may have weakened at the end of the year. This raises the chances that the economy contracted in the fourth quarter and fell into recession.”