Households are borrowing more and saving less, report shows

interactive investor comments on the Bank of England's Money and Credit Report.

Commenting, Myron Jobson, Personal Finance Campaigner, interactive investor, says: “A fall in cash squirrelled away into savings accounts in December is perhaps partly attributed to the unleashing of pent-up demand to revel in the Christmas festivities after Covid restrictions curtailed celebrations for many a year before.

“However, it could be more indicative of the impact the escalating cost of heating and eating amid the cost-of-living squeeze has had on households.

“Inflation, which is expected to reach around 6% by the spring, continues to outstrip wage growth, which means that households will need to save less to maintain their current level of expenditure. Many of those struggling to make ends meet may become dependent on loans to cope with the inflationary stranglehold on their finances.”

Savings

“The pendulum has swung in the opposite direction when it comes to savings. Many households saw savings soar during the pandemic because of lower outgoings with people stuck at home amid Covid lockdowns, while generous support, such as furlough, helped to shore up incomes. These savings have driven a torrent of consumer spending, and for many helped pay off debts. But the pandemic-era excess savings are dwindling for many. The amount of cash savings placed with banks, building societies and NS&I accounts in December was lower than pre-pandemic flows.

“Many households now find their savings dwindling, or even depleted, amid the cost-of-living crisis. The removal of the government’s work from home guidance has seen the return of costs associated with working from the office such a commuting and childcare costs - adding financial pressure on those who have transitioned from working from home in recent weeks.”

Mortgages

“Mortgage approvals rose last month, underpinning the robust demand for housing. But a housing affordability squeeze lies on the horizon.

“Housing affordability is largely dependent on three factors: house prices, household income and mortgage interest rates. For many prospective buyers, access to cheap mortgages is not the problem – mortgage rates remain low by historical standards despite December’s interest rate rise and will remain so if the base rate rises to 0.5% as anticipated on Thursday. But buyers have to save bigger deposits than they did pre-pandemic as UK house price growth has significantly outpaced the rise in average earnings in recent history.

“This is exacerbated by the cost-of-living squeeze which adds more pressure on budgets, while the prospect of higher interest rates to tackle rising inflation would make the cost of mortgages unattainable for first-time buyers in particular.

“However, higher mortgage rates would exert a cooling effect on the housing market, which has come off the boil since the end of the stamp duty holiday.”

Key points

• Net borrowing of mortgage debt by individuals amounted to £3.6 billion in December. Mortgage approvals for house purchase rose to 71,000 in December, above the 12-month average up to February 2020 of 66,700.
• Consumers borrowed an additional £0.8 billion in consumer credit, on net. The effective rate on new personal loans fell by 16 basis points to 6.27% in December
• The amount deposited into savings accounts in December was lower than pre-pandemic flows; in the year to February 2020 (£3.2billion versus £5.5 billion).