Increased competition among banks and the end of many fixed-rate deals has led to a rise in demand for mortgages over the past 12 months, a new survey shows.
Mortgage approvals by the main high street banks rose by 3% in May 2018, compared with the same period last year.
However, the number of approvals for remortgages was much higher – a rise of 18%, as homeowners took advantage of a competitive market to shop around for better deals. Some customers were forced to remortgage because their fixed-rate deal had come to an end.
Industry experts also suggested that the rush to remortgage might be as a result of homeowners wanting to lock into a competitive deal head of a potential interest rate rise in August. At this month’s meeting, the Bank of England’s Monetary Policy Committee voted 6-3 against increasing the base rate by 0.25% from its current level of 0.5%, but there are signs this sentiment may change.
UK Finance is the trade association which represents the finance and banking industry in the UK. Its report showed that gross mortgage lending for both new loans and remortgages was £22.2 billion in May 2018, 8.8% higher than the same month a year earlier.
Approvals for house purchases were 3.8% lower than the same month a year earlier, the Household Finance Update for May 2018 revealed.
While more was spent on credit cards, the amount borrowed via overdrafts actually dropped. Credit card spending was 2.3% higher in May than a year earlier, with outstanding levels of card borrowing having grown by 5.7% over the year.
The total of 193 million credit card purchases in May was above the previous 12-month average of 181 million, reflecting increased retail sales. Outstanding overdraft borrowing was 3.9% lower compared to the same time last year.
There were also signs that households were putting money in easy access accounts in case they needed cash in a hurry. Personal deposits grew by 1.6% in the 12 months to May 2018. Deposits held in instant access accounts were 4.4% higher than a year earlier.
Eric Leenders, personal finance chief at UK Finance, said some of the remortgaging was due to lenders giving customers more notice of the fact that their current deal was about to expire.
“May’s increase in mortgage approvals was driven by strong growth in remortgaging, as a large number of fixed-term mortgages came to an end and homeowners took advantage of a competitive market to shop around for attractive deals,” he said. “Increased efforts by lenders to contact their customers before their current mortgage deal expires have also contributed to this rise.”
Card spending was boosted by sunny bank holidays and the Royal Wedding celebrations, but overall the economic picture remained mixed, as household incomes continued to be squeezed.
“This may explain the growth of deposits held in instant access accounts, with consumers increasingly choosing to keep their money close to hand,” he said.
UK Finance, which brings together the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association, also revealed that the UK economy is growing at its slowest pace in more than five years.
Manufacturing and construction growth is weaker, and consumers are tending to spend less in stores as a result of inflation being higher than pay growth, its Economic Outlook report said.
High levels of employment and low levels of interest rates mean consumers are generally upbeat, although they are concerned about their day-to-day finances and the effect inflation is having on their buying power.
Half of firms said they were more optimistic about the economy than they were at the start of the year, but investment levels were down.
UK Finance expects real investment for the long term to continue to grow at a rather muted pace, as businesses remain wary of Brexit negotiations.
Henry Woodcock, principal mortgage consultant at IRESS, said the increase in mortgage lending had been driven by homeowners and landlords looking to remortgage as fixed rates ended.
“Many market commentators expect a base rate rise by the Bank of England in August, so this could also have been a contributing factor to the increase in mortgage lending,” he said.
“Lenders typically start to increase the cost of borrowing when they feel a base rate rise is on the horizon, but we’re seeing some unusual behaviour at the moment. Many seem to actually be offering competitive deals for fixed-rate home loans in a rush to attract customers hoping to secure a mortgage ahead of a potential interest rates rise.”