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UK demand for mortgages slumps as interest rates fall

The latest official figures show that demand for mortgages has collapsed to its lowest level since the depths of the 2020 lockdown as rising interest rates deter potential homebuyers.

The Bank of England said the number of home loan approvals had dropped to 35,600 in December from 46,200 in November – the fourth monthly fall.

With the cost of borrowing increasing, Threadneedle Street said it was the lowest monthly total for mortgage approvals since May 2020, when the UK economy was affected by a near-blanket lockdown.

Excluding the pandemic and its immediate aftermath, the December total was the lowest since January 2009, when the economy was deep in recession after the global financial crisis.

The Bank said the effective interest rate – the actual borrowing cost – paid by newly drawn mortgages increased by 32 basis points to 3.67% in December, the most significant monthly increase since December 2021, when Threadneedle Street’s nine-strong monetary policy committee began a series of nine consecutive increases in official rates.

The financial markets widely expect a 10th increase – from 3.5% to 4% – when the monetary policy committee announces its latest decision on Thursday.

Ashley Webb, a UK economist at Capital Economics, said the drag on housing market activity would likely intensify over the next six months because 75% of all outstanding mortgages were on fixed interest rates. Hence “many existing borrowers have yet to feel the full effects of higher interest rates”.

The Bank’s money and credit figures also revealed that households have been dipping into their savings, rather than using credit cards, to support their spending during Britain’s cost of living crisis. Consumers paid off £500m of credit card debt, while the increase in cash held in bank accounts was £3.9bn in December compared with a rise of £5.7bn in November.

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