BOE says UK credit card lending and mortgage interest rates jump

UK credit card borrowing rose at its strongest pace since 2005, and mortgage interest costs jumped to the highest in 6 years, indicating growing strain on household budgets.

The Bank of England (BOE) said annual growth in credit card debt rise 13 per cent, which was the most in 17 years. The average interest rate on new mortgages rose 18 basis points to 2.33 per cent last month, up from 1.5 per cent last November.

The figures suggest households are taking on more debt to cover basic living costs as food and energy prices rocket and the worst bout of inflation in 4 decades eats into spending power. The central bank has boosted its benchmark lending rate from near zero to 1.75 per cent and is poised to move again next month.

“The most vulnerable have run out of quick fixes, which is why we continue to see considerable growth in demand for credit,” said Paul Heywood, chief data and analytics officer at Equifax UK. “They have cancelled recurring subscriptions, swapped to less expensive supermarkets, and reduced spending on clothes, food and holidays. Yet households are still struggling to make ends meet.”

The average credit card interest rate has risen just above its pre-pandemic level at 18.57 per cent. Overall, including personal loans, consumer credit grew 6.9 per cent in the year to July, the fastest annual rate since March 2019.

Investors anticipate the BOE will more than double its benchmark lending rate to 4 per cent in the next year to rein in inflation.

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While some households are taking on more debt, others are tucking away savings fro a rainy day. The BOE said households put £4.3 billion into savings accounts in July, compared with £2.6 billion a month earlier.

Deposits rocketed in the pandemic but, with rates so low, people were happy to leave their money in current accounts. They are now shifting into higher-rate fixed term accounts at the fastest rate since 2010.

“Flows into time deposits remained strong at £2.8 billion, which is the highest since November 2010,” the BOE said.

Higher rates are driving up mortgage costs and appear to be slowing the market. The average mortgage rate on new loans is back at levels last seen in 2016.

Approvals for home purchases - a measure of the strength of the market - remained weak at 63,000. That compared with 63,200 in June and was ahead of forecasts for just 62,000. However, that was still below the 12-month pre-pandemic level. Net mortgage borrowing decreased slightly from £5.3 billion in June to £5.1 billion in July. BLOOMBERG