The UK housing market continues to feel the chill from higher borrowing costs. New data from the Bank of England shows that mortgage approvals for home purchases fell to 53,443 in September, down from 54,814 in August. That's the lowest level since December 2023, a sign that the recent rise in interest rates is taking a toll on would-be buyers.
At the same time, the central bank's figures revealed a contrasting trend: unsecured consumer credit—credit cards, personal loans, and other borrowing—grew at its fastest annual pace since 2018. That suggests many households are turning to borrowing to cover everyday expenses, even as confidence softens.
Why mortgage approvals are falling
Mortgage approvals are a key indicator of housing market activity. They reflect the number of new home loans that lenders have agreed to provide, and they tend to lead actual house purchases by a few months. A drop in approvals often signals that demand for homes is cooling, which can eventually weigh on house prices.
The Bank of England has been raising its base rate to combat inflation, and markets are currently pricing in a possible move to 4% from the current 3.75%. But fixed-rate mortgages don't follow the base rate tick-for-tick. Instead, lenders typically price them off wholesale rates, such as SONIA swaps (a benchmark for expected UK interest rates) and government bond yields. When investors push up gilt yields and wholesale rates, banks' own funding costs rise, and they often reprice new deals and remortgage offers quickly—sometimes before the Bank of England actually changes its base rate.
That dynamic is playing out now. With markets leaning toward another rate hike, lenders are already adjusting their mortgage offers, making it more expensive for buyers to borrow. The result: fewer approvals, as some potential buyers are priced out or decide to wait.
Consumer credit: a sign of strain
The jump in unsecured consumer credit is a separate but related story. When everyday costs rise faster than incomes, some households turn to credit cards and personal loans to bridge the gap. The fact that this borrowing is growing at its fastest annual pace since 2018 suggests that many people are feeling the squeeze.
This trend is worth watching because it can be a double-edged sword. On one hand, consumer spending helps support the economy. On the other, if households are taking on more debt to cover basic costs, they may become more vulnerable to future shocks, such as further rate rises or job losses.
The UK's budget watchdog has already warned that mortgage payments could take their biggest share of household income since 2009 over the next five years. That's a stark reminder that higher rates don't just affect new buyers—they also hit existing homeowners who are coming up for remortgage.
What it means for investors
For everyday investors, the key takeaway is that the housing market is slowing, and that has ripple effects across the economy. Housebuilders, estate agents, and lenders could see their earnings pressured if the trend continues. On the other hand, banks might benefit from higher net interest margins, even as loan volumes decline.
For homeowners, the message is more personal. If you have a fixed-rate mortgage that's due to expire soon, you may face a significant jump in your monthly payments when you remortgage. Lenders often pass on higher wholesale costs quickly, so it's worth checking what rates are available well before your current deal ends.
For those thinking about buying a home, the current environment means affordability is tighter. Higher borrowing costs and stricter affordability checks could make it harder to get a loan, and the pool of available properties may shrink as sellers hold off.
The broader economic picture is also important. The Bank of England's next move will be closely watched. If it raises rates to 4%, that could further cool the housing market and put more pressure on household finances. But if inflation shows signs of easing, the central bank might pause, which could stabilise mortgage rates.
Investors should also keep an eye on consumer credit trends. If borrowing continues to grow rapidly, it could signal that households are becoming overstretched, which might lead to higher default rates down the line. That would be a concern for banks and other lenders.
In the meantime, the housing market is likely to remain subdued. As Europe's property deals re-trade as higher rates bite, the UK is not immune to the global trend of higher borrowing costs reshaping real estate markets.
For a broader view, the Federal Reserve's recent decision to hold rates but signal a possible December hike shows that central banks worldwide are still grappling with inflation. And the slump in US allies' Treasury buying could have implications for global bond yields, which in turn affect mortgage rates everywhere.
Ultimately, the September data is a clear sign that higher rates are working to cool the housing market. But they're also squeezing household budgets, and that tension is likely to be a central theme for the UK economy in the months ahead.
