UK mortgage market still ‘precarious’ amid uncertainty over timing interest rate cuts

The recovery in the mortgage market at the turn of the year continued to lose momentum in May, new figures show, as uncertainty over the timing of interest rate cuts weighed on activity.

Figures from the Bank of England showed that just under 60,000 mortgages were approved in May, down from 60,800 in April and just over 61,000 in March. Mortgage approvals are an indicator of future mortgage lending.

Approvals for remortgaging also decreased slightly in May, falling to 29,600 from 29,900 in April.

Mortgage approvals rose at the beginning of the year, reaching their highest levels since the mini-budget as lenders cut rates on new deals in anticipation of interest rate cuts.

However, since then, markets have pushed back bets on when interest rates will be cut, forcing mortgage rates up. Bank data showed that the ‘effective’ interest rate on newly drawn mortgages rose by five basis points to 4.79 per cent in May.

“The strong recovery in mortgage demand seen in the early part of the year has petered out of late, in keeping with the rise in quoted mortgage rates over the past few months,” Peter Arnold, EY UK chief economist, said.

Tom Cuppello, director of risk at Broadstone, said the housing market’s recovery remained “precarious” amid uncertainty over the timing of interest rate cuts.

Economists think there is a roughly 50 per cent chance that the Bank will cut rates in August, although it depends on the next batch of inflation figures.

The Bank’s money and credit figures also pointed to a strong rise in consumer borrowing in May, with borrowing bouncing to £1.5bn from £800m in April. This was largely driven by an increase in borrowing on credit credits.

Some economists suggested that this was a positive sign of growing consumer confidence in the economy, although Karim Haji, global and UK head of financial services at KPMG, said there were causes for concern.

“More borrowing at higher rates, at a time when the cost of living is still high, should be cause for additional vigilance amongst lenders,” Haji said.

“Whilst some may be learning to live with a higher cost of living and less disposable income, default rates for mortgages have recently ticked upwards – albeit are still at lower levels than they were pre-pandemic – and unsecured loan default rates remain elevated,” he continued.