Interest rates

BOE says UK credit card and mortgage lending interest rates are rising

Credit card borrowing in the UK rose at its fastest pace since 2005, and mortgage interest charges hit their highest level in six years, indicating mounting pressure on household budgets.

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Credit card borrowing in the UK rose at its fastest pace since 2005, and mortgage interest charges hit their highest level in six years, indicating mounting pressure on household budgets.

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The Bank of England said annual growth in credit card debt rose 13%, the highest in 17 years. The average interest rate on new mortgages rose 18 basis points to 2.33% last month from 1.5% last November.

Figures suggest households are taking on more debt to cover basic living costs as food and energy prices soar and the worst inflation spurt in four decades eats away at purchasing power . The central bank raised its benchmark rate from near zero to 1.75% and is set to move again next month.

“The most vulnerable no longer have quick fixes, which is why we continue to see tremendous growth in demand for credit,” said Paul Heywood, head of data and analytics at Equifax UK. “They’ve canceled recurring subscriptions, swapped to cheaper supermarkets and cut spending on clothes, food and vacations. Yet households are still struggling to make ends meet.

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The average credit card interest rate rose just above its pre-pandemic level to 18.57%. Overall, including personal loans, consumer credit grew 6.9% on the year to July, the fastest annual rate since March 2019.

Investors expect the BOE to more than double its benchmark lending rate to 4% next year to contain inflation.

While some households take on more debt, others put aside their savings in case of bad weather. The BOE said households put £4.3bn into savings accounts in July, up from £2.6bn a month earlier.

Deposits skyrocketed during the pandemic but, with rates so low, people were happy to leave their money in checking accounts. They are now shifting to higher rate fixed term accounts at the fastest rate since 2010.

“Flows into term deposits remained strong at £2.8bn, the highest since November 2010,” the BOE said.

Higher rates are driving up mortgage costs and appear to be slowing the market. The average mortgage rate on new loans has returned to levels last seen in 2016.

Home purchase approvals – a measure of market strength – remained weak at 63,000. This compares with 63,200 in June and was ahead of forecast by just 62,000. However, this was still below the 12 month pre-pandemic level. Net mortgage borrowing fell slightly from £5.3bn in June to £5.1bn in July.