Cost of living hits savings boom and triggers rush to credit cards

The Bank of England’s Money and Credit report, which provides a state of the nation’s finances, shows a turnaround in our savings and borrowing habits.

People’s savings habits have returned to pre-pandemic levels. New savings into banks and building society accounts dropped to £5.5 billion in October, the lowest amount since February 2020, according to data from the Bank of England.

Meanwhile, new deposits into NS&I (National Savings and Investments) of £900 million in October bring the total amount of savings to £6.4 billion. This is almost half the average of £11.9 billion in the 12-month average up to September this year.

Meanwhile, consumer credit grew by £706 million in the same month, including £637 million more on credit cards, the largest amount of card borrowing since July last year, the Bank data showed. It indicates that credit card use is making something of a comeback: there was borrowing of £600 million also in September.

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A turnaround in our saving and borrowing habits is particularly stark since May 2021. Between the start of the pandemic and April this year, we only had two months when we borrowed more than we repaid. Since May, this has happened in five of the six months.

Could it be that the savings boom of the pandemic is unlikely to return anytime soon? In the coming months, rising prices, energy costs and high inflation will continue to eat into everyone’s spare cash, while we gear up for (hopefully) a bumper Christmas after missing out last year by spending some of our savings or flashing our credit cards?

Myron Jobson, interactive investor's personal finance campaigner, says: “An uptick in the demand for loans suggests that many still find themselves in a financially precarious position – made worse by the cost-of-living crisis. The importance of paying closer attention to your financial well-being and taking some time to plan ahead to help fortify your finances.”

Mortgage meltdown

The savings and credit card data was released alongside figures showing mortgage lending fell dramatically last month after the government withdrew the stamp duty holiday, the tax break that helped to support the property market during the pandemic.

New mortgage debt dropped to £1.6 billion in October, down from £9.3 billion in September. Mortgage approvals for house purchases was 67,200. This is the lowest since June 2020, and close to the monthly average in the year before the pandemic. 

The drop was to be expected, since the stamp duty holiday - used to encourage homebuyers - came to an end in October. The property market has been booming since summer 2020 when the first £500,000 of a property purchase became tax-free. The tax relief ‘holiday’ was extended to the end of June this year when it was halved to £250,000 before finishing in October. Experts say the figures are reassuring and suggest the housing market is returning to normal

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Jobson adds: “During the pandemic, the housing market has been propped up by the stamp duty holiday, cheap mortgage deals, and a desire for fresh and more spacious surroundings. While demand for property remains strong, the end of the stamp duty holiday carrot as well as the pressures of the rising cost of living and impending increases in taxes are significant contributing factors to a wane in demand for mortgages.”

Meanwhile, the average house price in the UK hit £250,000 for the first time in October too, according to Nationwide, the building society. “There is little respite when it comes to house prices,” says Jobson.

“With the price of the average UK house price growing by 10% in November compared to a year earlier, according to Nationwide’s house price index. A demand-supply mismatch, with the supply of family homes particularly stretched, and continued low borrowing rates are likely to sustain the trend of high average prices for some time to come.”

ii has some great ways to save in the run-up to Christmas and generally keep your outgoings in check