Households Return to Saving as Borrowing Hits Five-Year High
In June, households in the UK returned to saving after a record amount of money was withdrawn from deposits the previous month, according to figures released by the Bank of England. The increase in saving comes as inflation and interest rate pressure continue to impact households, leading to a rise in borrowing.
Net consumer credit reached its highest level since April 2018, with £1.7 billion borrowed in June. This follows a decrease of £500 million in lending in May. The rise in borrowing was driven by personal and car loans, with £1 billion borrowed, an increase of £500 million compared to the previous month. Credit card borrowing remained stable at £600 million.
Despite the rising interest rates making debt and mortgage bills more expensive, the number of mortgage approvals increased in June. Approvals for house purchases reached a surprising 54,700, the highest number since October 2022. Remortgaging also saw an increase, with 39,100 approvals during the same period.
Interest rates have been raised 13 consecutive times in an effort to bring down inflation, which currently stands at 7.9%, to the target rate of 2%. The full impact of these rate rises is unlikely to be reflected in the rates quoted in June and may not be fully seen until October.
Encouraging Return to Saving
The rising interest rates did encourage consumers to return to saving after a record amount was withdrawn in May. In June, an additional £3.4 billion was deposited with banks and building societies, following net withdrawals of £3.1 billion in May.
The majority of savings were deposited into interest-bearing time accounts, with £6.6 billion flowing into such accounts, up from £5.1 billion the previous month. Additionally, after seven months of net withdrawals, deposits into non-interest bearing accounts rose to £2.1 billion.
Despite the Bank’s base interest rate standing at 5%, the effective interest rate charged on new mortgages was 4.63%. Andrew Wishart, senior property economist at Capital Economics, predicts that increases in mortgage rates are likely to gather pace given the recent sharp rise in rates.
Individuals’ net borrowing of mortgage debt increased to £100 million in June, following net repayments of £100 million in May and record high net repayments of £1.1 billion in April.
Overall, the combination of rising borrowing and increased saving reflects the ongoing impact of inflation and interest rate pressure on households in the UK.
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