Home mortgage approvals drop to lowest since December 2023

UK home mortgage approvals fell to 56,200 in May, marking the lowest level since December 2023 and a significant drop from the 66,000 recorded in April. The decline is primarily attributed to rising borrowing costs and economic uncertainty stemming from geopolitical conflict in the Middle East, which pushed the effective interest rate on new mortgages to 4.22%. This trend reflects a cooling in the residential mortgage sector as buyers and lenders react to a volatile interest rate environment and higher living costs.

According to the Bank of England's latest money and credit report, mortgage approvals for house purchases dropped to 56,200 in May, falling well below the six-month average of 63,300. This sharp decline follows a period of heightened activity in April and represents the lowest volume of approvals since late 2023. Remortgaging activity, specifically involving switches to different lenders, also saw a substantial contraction, falling from 51,200 in April to just 33,300 in May. Lucian Cook, head of residential research at Savills, described the figures as a reality check for the market following several months of unexpectedly robust signals.

The primary driver for the slowdown appears to be the geopolitical instability caused by the US-Israel war with Iran, which began in late February. This conflict led to the withdrawal of various mortgage products and a subsequent rise in average fixed rates as financial uncertainty permeated the market. Jason Tebb, president of OnTheMarket, highlighted that the effective interest rate on newly drawn mortgages increased to 4.22% in May. Tebb noted that the ongoing conflict has pushed up inflation and energy prices, effectively keeping borrowing costs elevated for a longer duration than many market participants had anticipated.

Despite the recent dip, some analysts remain optimistic about the sector's underlying strength. Rob Wood, chief UK economist for Pantheon Macroeconomics, suggested that the May figures might reflect a correction after households rushed to secure deals in April to get ahead of predicted rate hikes, rather than a permanent disruption. Furthermore, Rachel Springall of Moneyfacts noted that mortgage rates began to retreat from their April peaks toward the end of the period. As swap rates fall and competition returns to the lender landscape, experts anticipate that easing headline fixed rates may soon provide much-needed affordability relief for new buyers.