(March 30): Approvals for UK home loans climbed for the first time in five months, a sign housing demand was gaining momentum before the mortgage market was rattled by the war in Iran.
The number of mortgages given the green light by lenders rose to 62,584 in February, up from 60,246 the previous month, Bank of England (BOE) showed on Monday.
However, the widening conflict in the Middle East may become a drag on the housing market after it prompted lenders to pull deals and ramp up mortgage rates. Two-year fixed mortgage rates have jumped to their highest in over 1½ years after markets wagered that the BOE will hike interest rates to contain a resurgence in inflation caused by the war.
The BOE figures also showed unsecured lending rose to £1.9 billion from £1.8 billion, with the increase driven by “other loans and advances,” a category that includes personal loans and car finance. Borrowing on credit cards edged down on the month.
“The February figures may end up looking less like the start of a sustained recovery and more like a brief window before global turmoil asserts it,” said Martin Beck, chief economist at WPI Strategy. “With the housing market highly sensitive to sentiment and borrowing costs, what looked like a gradual thaw could yet turn back into a freeze.”
The average two-year fixed mortgage rate has soared from 4.83% at the start of March to 5.77%, the highest since August 2024, according to data from Moneyfacts. The five-year fixed rate is at its highest since November 2023.
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It said on Monday that lenders are “cautiously re-entering the market after withdrawing a significant number of deals” as the conflict caused traders to reassess their expectations for rate cuts by the BOE.
Before the war investors were expecting one or two quarter-point reductions from the UK central bank this year. Now they are betting on two hikes with a strong possibility of a third.
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“It is increasingly plausible that leading fixed rates settle closer to 5% in the near term, representing a significant squeeze on borrowers,” said Simon Gammon, managing partner at Knight Frank Finance.
Capital Economics chief UK economist Paul Dales said “it’s pretty clear that house prices won’t live up to our pre-war forecast of a 3.5% rise in the year.” Thomas Pugh, chief economist at RSM UK, noted that mortgage approvals fell sharply in 2023 in the wake of the cost-of-living shock triggered by Russia’s invasion of Ukraine.
However, Pugh said households were entering the current crisis from a position of relative strength, with the latest BOE figures showing that on average they’ve deposited £6.5 billion a month with banks and building societies over the past six months.
“That gives plenty of scope to reduce saving to offset the hit from higher energy bills,” he said.
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