UK mortgage approvals fall to two-year low as higher rates weigh on housing market

Mortgage approvals for house purchases fell to their lowest level in more than two years in July, highlighting the continued weakness of the UK housing market as higher borrowing costs and geopolitical uncertainty weigh on prospective buyers.

Banks and building societies approved 56,053 mortgages for house purchase during July, according to the Bank of England’s latest Money and Credit report. The figure was the lowest since January 2024, when 56,032 approvals were recorded, and was down from 58,215 in June.

Over the past six months, monthly mortgage approvals have averaged about 60,800, underscoring the extent of the recent slowdown.

The weakness in mortgage demand came despite signs that underlying housing affordability has gradually improved, with house price growth remaining modest relative to earnings.

Remortgaging activity was somewhat more resilient. Approvals for remortgaging with a different lender rose to about 34,500 in July, from 34,100 in June.

The data came as Nationwide Building Society reported that average UK house prices edged up 0.2 per cent month on month in August, following a 0.1 per cent decline in July.

The average property was worth £275,465 in August, representing annual growth of 1.6 per cent.

Lucian Cook, head of residential research at Savills, said the recent rise in mortgage costs had prevented improving affordability from translating into stronger market activity.

“The increase in fixed rate mortgage costs we saw in mid-July, has prevented that from translating into any improvement in activity in the market, leading to a third consecutive month of weak mortgage approvals,” he said.

“And with more inflation to work its way through the system, it seems unlikely that we will see much of a sustained turnaround over the course of the remainder of the year.”

Hina Bhudia, a partner at Knight Frank Finance, said the combination of geopolitical uncertainty and energy prices had pushed mortgage rates higher.

“Geopolitical tensions and elevated energy prices pushed mortgage rates higher during the summer, which has weighed on demand in the housing market,” she said.

Mortgage pricing remains particularly sensitive to movements in wholesale markets. Mark Harris, chief executive of mortgage broker SPF Private Clients, said some lenders had begun cutting rates, but volatility in swap rates was limiting the scope for a sustained improvement.

“On the ground, some lenders have been easing mortgage rates in recent days and weeks but swap rates, which underpin the pricing of mortgages, remain extremely volatile in response to tensions in the Middle East,” he said.

Harris said the modest increase in remortgaging activity suggested borrowers were increasingly willing to switch providers in search of better deals.

“Remortgaging numbers picked up slightly, suggesting that borrowers may be shopping around for better rates rather than sticking with their existing lender when their current deal comes to an end,” he added.

The Bank of England data also showed that households continued to increase their use of consumer credit. Net borrowing of consumer credit rose to £2.0bn in July from £1.9bn in June, slightly above the previous six-month average.

Credit card borrowing fell to £0.9bn from £1.0bn, while net borrowing through other forms of consumer credit, including car finance and personal loans, increased to £1.1bn from £0.9bn.

At the same time, households continued to build up cash savings. Deposits with banks and building societies increased by £3.8bn in July, although that was down from £6.2bn in June.

Businesses also increased their borrowing. UK non-financial companies borrowed a net £1.8bn from banks and building societies in July, including overdrafts, compared with £1.6bn in June.

The figures present a mixed picture of household and corporate finances. Consumer borrowing remains elevated while households are continuing to accumulate deposits, but the sharp decline in mortgage approvals points to a housing market in which higher financing costs are still restraining demand.

The key question for the property market is whether mortgage rates can stabilise sufficiently to allow improving affordability to translate into stronger transaction activity. For now, volatile financial markets and renewed inflationary pressure are keeping prospective buyers cautious.