Soaring living costs and high interest rates have pushed mortgage borrowing to its lowest level on record.
Bank of England data has revealed the amount borrowed on mortgages dropped by £1.4 million over the month of April as the number of mortgages approved for house purchases sunk from 51,000 to 48,700.
The data comes as Nationwide reported a 0.1% drop in house prices during May – this followed a 0.5% upturn in values in April.
According to its latest house price index, prices have fallen by 3.4% over the last year and the average property is now valued at £260,736.
Now, with net borrowing at its lowest level – excluding the period during the Covid pandemic – since records began in 1993 plus house prices falling 4% below the August 2022 peak many are bracing themselves for a stormy time ahead.
Karen Noye, mortgage expert at Quilter, said the data points to a housing market which was ‘freezing up at a time when property transactions should be flowing nicely’. She added: “The outlook for the housing market is somewhat bleak as we head into the summer months.
“Despite the more secure economic footing, and the fact a recession seems to have been avoided for now, the path of interest rates remains extremely uncertain.
“We are expecting the Bank of England to have to raise rates again at its next meeting, and with inflation refusing to come down more quickly it is not out of the realms of possibility that further rises later in the year will be required.
“Clearly interest rates are having a significant effect on the housing market.”
The impact of inflation and interest rates on the housing market
The Bank of England (BoE) has been raising interest rates in a bid to combat inflation, which is still very high and at 8.7%, well above the 2% target.
When interest rates rise, mortgage rates tend to follow a similar pattern and this makes repayments more expensive and puts people off buying homes. It is widely predicted the BoE will raise rates to 5.5% in the next few months.
In the meantime, lenders have been withdrawing products as they assess market conditions and there have also been some fixed-rate mortgage price rises.
Alice Haine, personal finance analyst at Bestinvest, explained more: “The uncertainty could see mortgage activity slow, as people are put off moving home over fears of hefty repayments they may struggle to afford or because they simply don’t qualify.
“Those on the cusp of securing a mortgage deal may find their hopes dashed if higher rates take their dream home out of their financial reach.
“For now, affordability continues to be a major challenge for many buyers who may either have to downsize their buying aspirations to get their deal across the line or abandon their plans altogether.
“The only glimmer of hope is that house prices are falling, albeit slowly, with the latest Nationwide House Price Index declining 0.1% in May as sticky inflation and rising borrowing costs dent affordability levels.”
