Households’ credit card borrowing grew at the fastest annual rate since 2005 in April, according to Bank of England figures – just as a string of price rises started to hit.
The annual growth rate for all consumer credit, which includes borrowing on credit cards, overdrafts, personal loans and car finance, increased to 5.7% in April from 5.2% in March. This was the highest rate since February 2020.
A rise in the energy price cap, council tax increases and a 1.25 percentage point rise in National Insurance (NI) to pay for health and social care were among the higher costs in April.
The fear is that with inflation at 9% - a 40-year-high - and soaring energy and fuel costs, the situation will only worsen as the cost-of-living crisis escalates
Alice Haine, Bestinvest
Last week, Chancellor Rishi Sunak announced a package of support to help people with living costs, including support targeted at those who are particularly vulnerable.
Thomas Pugh, economist at RSM UK, said: “The latest Money and Credit figures suggest that consumers are increasingly borrowing more to protect their lifestyles from the surge in inflation.”
Alice Haine, personal finance analyst at investment platform Bestinvest, said: “The fear is that with inflation at 9% – a 40-year-high – and soaring energy and fuel costs, the situation will only worsen as the cost-of-living crisis escalates.”
She added: “The risk is that those that take on debt now may be creating a whole host of problems for themselves further down the line when costs rise even further.”
Ms Haine continued: “To put the situation into perspective, however, it’s important to note that card borrowing is rising from a real low and this is more of a gentle upward trend than a sudden spike.
“Plus, many households are still hanging on to excess savings built up during the pandemic, so the situation is not at full crisis point yet.”
Given the starkness of some of the data here - such as large increases in consumer borrowing - banks will have welcomed the measures announced by the Chancellor last week
Karim Haji, KPMG
Karim Haji, head of financial services at KPMG UK, said: “Although April was when the new energy price cap kicked in, most households wouldn’t have received their revised utility bills until the end of the month, with the real impact on spending more likely to be seen in May.
“Given the starkness of some of the data here – such as large increases in consumer borrowing – banks will have welcomed the measures announced by the Chancellor last week.”
People borrowed an additional £1.4 billion in consumer credit in April, following £1.3 billion of borrowing in March.
It marks the third month in a row where borrowing has been higher than the average in the 12 months leading up to February 2020, of £1.0 billion, the Bank said.
Households also ramped up deposits into their accounts in April.
The combined net flow into bank and building society accounts, as well as NS&I (National Savings & Investments) accounts, in April was £6.3 billion, compared with an average monthly net flow of £5.5 billion in the 12 months leading up to February 2020.
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “Real spending should rise slowly in the second half of the year as real incomes start to recover – thanks partly due to Mr Sunak’s interventions last week.”
It doesn't help that lenders continue to pull products at short notice
Mark Harris, SPF Private Clients
The number of mortgage approvals made to home-buyers meanwhile fell to 66,000 in April, from 69,500 in March.
This was slightly below the 12-month pre-pandemic average up to February 2020 of 66,700.
Approvals for re-mortgaging, which only capture home loans with a different lender, also decreased, to 47,800 in April.
This was also below the 12-month pre-pandemic average up to February 2020 of 49,500.
Mr Haji added: “In the case of consumer and mortgage lending, banks are tracking the data even more closely than usual for the early signs of distress, to protect both themselves and households.”
Housing market reports have pointed to property values hitting a string of record highs in recent months, despite the pressure on households’ finances.
A lack of available properties and continued low mortgage rates by long-term standards are said to have helped to push prices upwards – although there have also been signs that the market could be softening, with more sellers offering discounts.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “There are still signs of strong activity in the market even though some of the heat has come out of it, and mortgage brokers remain exceptionally busy as borrowers worry about rising rates.
“It doesn’t help that lenders continue to pull products at short notice.”
He added: “Borrowers continue to favour longer-term fixes in order to protect themselves as much as possible, particularly as five-year products are so favourably priced compared with their two-year equivalents.”
There is a real sense of urgency among many borrowers who sense they must act soon or reassess what they can afford
Hina Bhudia, Knight Frank Finance
Hina Bhudia, a partner at Knight Frank Finance, said: “Activity among purchasers is ebbing as the cost-of-living squeeze shrinks the pool of buyers.
“Rates on certain products have doubled in the past 12 months and there is a real sense of urgency among many borrowers who sense they must act soon or reassess what they can afford.
“Demand to re-mortgage remains very strong as borrowers seek to beat rising interest rates.
“Certain lenders allow you to book rates up to nine months in advance, so thousands of borrowers are bringing forward decisions that in normal circumstances would have been put off.
“Lenders are struggling to stay on top of the flow of new applications and are withdrawing and repricing product lines to maintain service levels.”
Perhaps the fact this data only shows re-mortgages to other lenders suggests people are increasingly being forced to re-mortgage with existing lenders due to affordability issues
Andrew Montlake, Coreco
Andrew Montlake, managing director at mortgage broker Coreco, said: “Re-mortgages, contrary to what this data suggests, are going through the roof as people seek to lock into the lowest rates available before they rise further.
“Perhaps the fact this data only shows re-mortgages to other lenders suggests people are increasingly being forced to re-mortgage with existing lenders due to affordability issues.”
Martin Beck, chief economic adviser to the EY Item Club, said housing market activity is expected to continue to cool, moving through 2022.
He added: “But with the impact of higher interest rates only feeding through gradually due to the high share of outstanding mortgages on fixed-rate terms of two years or more, a soft landing looks likely unless the labour market outlook begins to deteriorate.”