Households ‘borrowing more but unwilling to touch savings’

Households’ borrowing using consumer credit increased in March at the fastest annual pace since before the UK’s coronavirus lockdowns started.

However, while some were taking on more debt, there were also signs that households were unwilling to touch savings built up during the coronavirus pandemic.

The annual growth rate for consumer credit borrowing picked up to 5.2% in March, from 4.5% in February, marking the highest annual rate since February 2020, according to Bank of England figures.

Consumer credit includes forms of borrowing such as credit cards, personal loans, car dealership finance and overdrafts.

Within the latest annual increase, credit card borrowing increased by 10.6%, the Bank’s Money and Credit report said.

Households also deposited £6 billion into banks, building societies and NS&I accounts in March. This was higher than a monthly average of £5.5 billion in the year leading up to the first UK lockdowns.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Households’ continued unwillingness to touch the savings they accumulated during the pandemic suggests that real expenditure is set to fall in quarter two in response to the squeeze on disposable incomes.”

He continued: “Admittedly, households are borrowing more to support their consumption and have scope to continue to so.”

But he added: “The low level of consumers’ confidence also suggests that unsecured borrowing will not pick up much further ahead.”

Karim Haji, head of financial services at KPMG UK, said: “The energy price cap came into effect on April 1 and the consensus is that the cost-of-living crisis will get worse as the year goes on.

“However, there’s so far little evidence of households running down the stock of savings accumulated during Covid-19, with the squeeze on incomes instead reflected in the rise in consumer credit.

“It was clear from the flurry of trading updates from the big UK banks last week that they are looking to use all the tools in their armoury to help consumers and businesses through a very difficult year.

“That will include payment holidays, increasing overdrafts and revolving credit facility limits, as well as loosening terms when they can. It also makes sense to provide temporary relief to customers.”

StepChange Debt Charity said a third (33%) of its clients in March had a negative budget – where income is insufficient to meet essential costs – up by four percentage points since January.

Richard Lane, StepChange director of external affairs, said: “High inflation in the cost of basic goods and services, such as energy bills and food, means that those households who already have little ability to flex their spending cannot absorb higher costs without incurring debt or suffering significant hardship.

“With the March data reflecting the situation worsening even before April’s energy price hikes, the months ahead will be challenging for households on tight budgets.”

There were also around 70,700 mortgage approvals made to home-buyers in March, a total which the Bank of England said was “little changed” and above the pre-pandemic average.

Approvals for re-mortgaging, which only capture home loans taken out with a different lender, rose slightly to 48,800 in March.

This total remained below the pre-pandemic average, but was still the highest figure since 52,100 re-mortgage loans in February 2020.

Jason Tebb, chief executive of property search website OnTheMarket.com, said the figures suggest that “positive buyer sentiment is holding despite several headwinds, including the rising cost of living and the potential for further interest rate rises”.

Adrian Lowery, financial analyst at investing platform Bestinvest, said: “As house prices stabilise and lenders tighten their mortgage availability criteria in the coming months, the trend is likely to return closer to levels seen before the pandemic disrupted the property market in a quite unpredictable manner.

“A detail in the release reveals that the ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 14 basis points to 1.73% in March, while the rate on the outstanding stock of mortgages ticked up two basis points to 2.04%, confirming that home-buyers and re-mortgagers are facing higher loan rates, as well as stricter borrowing rules.”

Nitesh Patel, strategic economist at Yorkshire Building Society, said: “Current activity still appears to be driven by buyers re-evaluating their housing needs, particularly for more space in less densely populated areas.

“That said, there have been reports suggesting the re-emergence in demand for city centre flats. Low borrowing costs and a strong labour market are also playing a key role in supporting the housing market.”

UK non-financial businesses borrowed £1.2 billion from banks in March, including overdrafts, on a net basis, compared with £3.8 billion in February.

Within this, small and medium-sized non-financial businesses (SMEs) made a net repayment. The net loan repayment by SMEs in March marked the 13th month in a row of net repayments, the Bank said.