Borrowing hits five-year high in June – but all is not as it seems

interactive investor comments on the latest Bank of England Money & Credit report.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Consumer borrowing soared to a five-year high in June as budgets continued to be weighed down by the prolonged cost-of-living crisis. While there is an element of people resorting to borrowing to bridge the gap between income and expenses with the cost of essential expenses such as food, energy and housing remaining elevated, a closer look at the figures suggests that all is not as it seems.

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“The amount of expenses put on the plastic remained stable at £600 million in June, but other forms of consumer credit such as car dealership finance and personal loans increased significantly from £500 million in May to £1 billion in June. The Bank of England doesn’t offer an exact breakdown of the credit products that come under the 'personal loan' banner, but any uptick in credit products, like car dealership finance, which can’t go towards footing the cost of everyday essentials underlines the polarised cost-of-living experiences between the ‘haves’ and ‘have nots.

“In any case, while borrowing may provide temporary relief, it can also exacerbate financial challenges if not used wisely. If you are struggling with debt, it is worth consulting a debt advice charity such as StepChange or Turn2Us. They will go through all your options.”

Mortgages

“The increase in mortgage lending and mortgage approvals shows there is a healthy appetite among buyers to get sales done despite the well-documented affordability pressures. Heavy negotiations are likely to be at play here. Property portal Zoopla recently reported that more buyers are negotiating discounts of 5% or more than at any time in the last five years.

“Remortgaging activity also edged higher – although the dataset only captures remortgaging with a different lender. The uptick in remortgage approvals could suggest that homeowners were keen to get deals on the table, which usually valid for up to six months, as storm clouds brewed over the mortgage marketplace. It could be a sign of things to come, with mortgage deals ticking lower amid expectations that interest rates won’t rise as high as feared following the lower-than-expected fall in inflation in June.

“The fact remains that recent housing market activity pales in comparison with the summer seasons of yesteryear because of the housing affordability squeeze. With mortgage rates likely to remain high for the foreseeable future, affordability is the key challenge facing borrowers.”

Savings

“There was a significant increase in the amount of cash deposited in fixed-term accounts, which typically offer a more attractive savings rate with a trade-off of not being able to access your cash without penalty until the end of a specified period. Amid growing suspicions that the interest-rate cycle is approaching its end, savers may seek to lock into the best deals before they are pulled from market.

“The increase in savings household deposits is offset by net outflows to the tune of £8.4 billion from ‘sight deposit’ accounts, flexible savings accounts allowing savers to make withdrawals without giving notice. This suggests that more and more people are being forced to raid easily accessible savings to help tide them over amid the cost-of-living crisis.”