Consumer Credit Borrowing Shrinks to Weakest Annual Rate in 26 Years

Bank of England figures.

“Households’ consumer credit borrowing shrunk by 3% annually in May, marking the weakest growth since records started in 1994.”   

Covid-19 has, no doubt, pulled hard on the economy. But, can we begin to understand the impact?

Recall that in 2016, the debt owed in unsecured borrowing hit high at £270bn. In general, each household was estimated to have been about £10,000 in debt. These debts rose from personal loans, overdrafts, and credit cards.

This report is according to PwC and also predicted that unsecured borrowing will rise by 165% in 2020. At the time, employment was on a positive rise, and people earned above the rate of inflation.

It was only in January when consumer credit borrowing increased by 0.3% for credit cards and 0.6% for other forms of credit. This rise remained the same in February. Although, based on a yearly report, February saw a 5.7% rise in bad credit borrowing. Credit cards rose by 3.5% and other forms of credit rose by 6.9%.

With the onset of the Covid-19 pandemic, many families have put a hold on borrowing and short term loans. They have been invested in living on what they have saved and not incur more debt on themselves. This saw March nosedive in the rate of unsecured consumer credit borrowing. 

May was hard hit as the credit borrowing margin showed a 3% contraction. This includes borrowing in the form of credit cards, personal loans of £100 £200 and £500 pounds, quick loans, and overdrafts. Prior to the drop in May, records in April show a one year fall at 0.4%.

February had shown a positive rise in consumer credit borrowing. Experts expected it to rise further by £0.7bn. Since taking a downturn in March, the spiral down has only worsened. By May, credit card lending was still on the nosedive by annual growth rate. This fall in the negative has carried on for 3 consecutive months. It is currently perched at negative 10.7%.

However, while credit borrowing is going down, other types of borrowing have stayed positive. The rise is shown to be at 0.7%.

According to the Bank’s Money and Credit report, most households are more interested in paying off debt than taking on new debt. The accumulated effect of Covid-19 weighed heavily on the month. Though it is difficult to ascertain if it is only a case trying to repay debts since social distancing laws have put a restriction on gatherings.

Mortgages have not been unaffected. Homebuyers have received a lot less approval on their applications. Plus, people seem less eager to buy new homes during this time.

According to the Bank’s report, May also saw the lowest number of mortgages approved for home buyers. The figure stands at 9,273 which is nothing the Bank has recorded from the time it started tracking the mortgage approval figures.

Even the financial crisis in 2008 saw better figures since it recorded about times over in the mortgage approval. 

Savings have seen an upsurge in the whole event. Households have taken to saving more than they spend.

Deposits in May rose as much as £25.6 billion. This is £11.3 billion rise from savings in March that totalled £14.3 billion. In April, the deposit was £16.7 billion, a £2.5 billion rise from savings in March.

In the later parts of 2019, deposits had remained a steady rise. Only six months to February, household deposits had grown steadily at an average of £5 billion monthly.

However, a rise in deposits didn’t mean a rise in interest rate, according to The Bank. From their report, May also saw a fall in the typical rate of interest paid on people’s deposits. New deposits were paid interest at the rate of 0.87% while outstanding deposits were paid at 0.29%.

As for borrowers, typical interest rates have become cheaper than it has ever been. 

New personal loans have been charged a typical interest rate of 5.10% in May. Since the Bank began to keep records in 2016, this is the lowest rate have gone. Just at the beginning of the year, the rate had been at 7%.

Personal loans were not the only rates that plunged. Credit card borrowing rates also declined. The typical cost came down to 18.36% in May. In April, it had been 18.54%, showing a 0.18% fall.

Against the backdrop of the May decline in financial borrowing activities, June seems to boast better returns. With recent records from indicators of buyer interest, parameters like how many people are browsing property websites have picked up to what it was pre-COVID. This only suggests that mortgage approvals are likely to bounce back in June.

Here is what Samuel Tombs, chief UK economist at Pantheon Macroeconomics, has to say: “Households’ spending likely will rebound over the summer, as some recently accumulated cash is spent in reopened shops and businesses.

Nonetheless, employment looks set to decline in the autumn when the Government’s income support schemes are set to be wound down, while low consumer confidence suggests that households will seek to save a larger proportion of their incomes than they did pre-COVID.

Accordingly, we continue to think that households’ spending will still be about 5% below its pre-virus peak in quarter four, even if the second wave of Covid-19 is avoided.

Mr. Tombs has also opined that it’s not a surprise that May came with a further downturn in mortgage approvals for house purchases. This says this because it is only recently that the housing market has gradually begun to reopen.

He goes on to say that: “Indicators of buyer interest, such as the number of people browsing property websites, have fully recovered to pre-COVID levels in recent weeks, suggesting that mortgage approvals will pick up in June.”

On another note, he says: “Lenders have become much more cautious, removing high LTV (loan-to-value) loans from the market and refusing a larger share of loan applications.

Accordingly, we still expect mortgage approvals to finish the year down 10% year-over-year and look for a 5% peak-to-trough fall in house prices.”

When Mark Harris, chief executive of mortgage broker SPF Private Clients spoke, he said that: “Covid-19 has had a devastating impact on the mortgage and property markets, so it is no surprise that lending was weak in May, with approvals for house purchase falling.

With lockdown meaning that lenders were unable to send valuers out to physically view properties, the number of mortgages approved fell considerably.

Lenders were kept busy processing mortgage payment deferrals and trying to get to grips with staff working from home rather than call centers, meaning it was far from ‘business as usual’.”

Only a final note, he admits that lenders are beginning to clear their backlogs and so, “we expect mortgage approvals to pick up”.

May has not been good on consumer credit borrowing, no doubt. Even though June looks promising, one can only keep their fingers crossed. Especially since predictions as close as February took the opposite turn.

With the ease in lockdown, perhaps valuers can visit properties now and access them. According to Mark Harris, this should lead to a turn-up in mortgage approvals. 

However, there is no telling. Going by the words of Mr. Tombs, more people might be cautious about spending this summer since autumn does not hold a lot of promise. It is likely that savings might begin to go down later in the year since government support would have dwindled.

While savings will begin to go down, credit borrowing will most likely shoot up. This will likely cause the typical interest rate on borrowing to go up, as well as a typical interest rate on savings.