Cost-of-living crisis could change borrowing and savings habits

interactive investor comments on the latest Bank of England Money and Credit Report.

• Individuals borrowed £0.6 billion (net) in consumer credit in January according to latest BoE Money and Credit report for January 2022. This is lower than the average of £1 billion in the 12 months up to February 2020.
• Net borrowing of mortgage debt by individuals increased to £5.9 billion in January, from £4.0 billion in December. This is above the pre-pandemic average of £4.3 billion in the 12 months up to February 2020.
• The effective interest rate paid on individuals’ new time deposits with banks and building societies rose by 31 basis points to 0.67%.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Borrowing on credit cards and personal loans has not returned to pre-pandemic levels. The pandemic and the cost-of-living crisis have made many people revaluate their spending and savings habits. People understand that the current financial pinch is only going to get worse this year, with inflation expected to hit 7%. For many, taking out more debt would add to the already weighty pressure on their budget.

“It is a difficult period for personal finances which will be hard to forget and, for some, could permanently change their spending and borrowing habits.

Mortgages

“The UK housing market remains red hot, fuelled by the ongoing demand-supply mismatch for property. However, soaring property prices combined with a lack of fresh choice of homes coming to market have hindered the ability or desire to move for many - which is likely to exert a cooling effect on the housing market. The prospect of more hikes in the near future and the worsening of the cost-of-living crisis have raised the affordability hurdle which could also contribute to a slowdown in the housing market.

Savings

“Deposits into savings accounts picked up in January and exceeded pre-pandemic flows. This could be explained by more people topping up their rainy-day pot as the cost-of-living crisis becomes more acute.

“The reprieve in the rate of interest offered on savings accounts that lock up cash for fixed periods of time is symbolic rather than a practical uplift. On a £1,000 pot, a 0.31% rise translates to a paltry £3 in interest. However, the direction of travel for savings rates is welcome as banks appeared content in keeping savings rates near rock bottom lows after having their coffers filled by lockdown accidental savers.

“For those who can afford to keep their money untouched for five or more years, investment remains the most attractive option, for the potential of greater returns that stand a better chance of beating inflation. Investing comes with inevitable risk, but taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach.”