UK Mortgage Lending Unexpectedly Falls After Interest Rate Hikes

UK mortgage approvals fell unexpectedly, and borrowers repaid debt at a historic pace after soaring interest rates increased the cost of serving loans.

(Bloomberg) — UK mortgage approvals fell unexpectedly, and borrowers repaid debt at a historic pace after soaring interest rates increased the cost of serving loans.

The figures from the Bank of England underscore the headwinds facing the property market, where years of price gains have come to a screeching halt. The central bank has signaled it will keep raising rates to curb inflation that remains four times higher than its target.

Lenders authorized 48,700 home loans in April, down sharply from the 51,500 approved in March, the Bank of England said Thursday. Economists had expected 53,300. The effective rate on new mortgages rose 5 basis points to 4.46% in April, closing in on the threshold of 5% the BOE has identified as painful to consumers.

A shock inflation reading in May fueled bets that the BOE will hike rates again, erasing the prospect of a pause in the quickest tightening in four decades. That’s starting to push up the cost of mortgages, while lenders are pulling cheap mortgage deals off the market.

Earlier Thursday, Nationwide Building Society said house prices resumed their decline in May and warned of increasing headwinds facing the property market.

The BOE figures showed households repaid £1.4 billion ($1.7 billion) of mortgage debt in April, the weakest month on record excluding the pandemic.

Consumers borrowed an extra £1.6 billion in unsecured credit, slightly more than forecast. It is not clear, however, whether the rise in borrowing reflects improving consumer sentiment of distress borrowing in the face of the cost-of-living crisis.

A separate BOE survey of chief financial officers found firms expect to increase prices by 5.1% in the year ahead, down from 5.9% in April but well above the 2% inflation target. The survey also showed executives anticipating inflation will strengthen and remain well above the BOE target at 5.9% over the next year, up from the 5.6% reading in April.

The Decision Maker Panel data is an indication of corporate pricing power and is closely watched by BOE policymakers, who are trying to prevent elevated inflation from becoming entrenched.

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