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Mortgage lending slumped by 60% in January with the net value of new loans falling to just £690m, figures from the Bank of England showed today.
Net lending, which strips out repayments and redemptions, had bounced back in December to £1.8bn, but has now returned to the levels seen in October and November. This is despite swingeing cuts to the Bank base rate, which have reduced interest rates to 1%, their lowest ever level.
New buyer numbers remained the same as in December, with 31,000 mortgages approved for house purchases during the month. This is up on November's figure of 27,000 but well below last January's figure of 70,000.
Falling interest rates may be behind a sharp fall in remortgaging since last autumn, as borrowers coming off fixed-rate deals have increasingly found they are better off moving to their lender's standard variable rate than locking in to a new short-term offer rate. This has been particularly true of those with little equity in their homes.
In October, 72,000 remortgages were approved, but this figure had fallen by half to 36,000 by December and in January it dropped to 34,000. The value of those loans dropped from £9.9bn in September to £4.3bn in January.
Buyer difficulty
The continued lack of mortgage activity reflects the difficulties faced by first-time buyers who are no longer being offered competitive deals by lenders. The best rates are aimed at those with at least a 40% deposit to put down, while would-be buyers with a deposit of just 10% are paying around 5% above base rate.
Falling house prices are also deterring some people from entering the market. This morning, Hometrack said prices in England and Wales had fallen by 0.8% in February, and other market surveys have also reported a continued drop in values.
Howard Archer, chief UK economist at IHS Global Insight, said: "The Bank of England reported that mortgage approvals remained mired near record low levels in January at a level consistent with markedly falling house prices. This defied expectations of a modest further rise in mortgage approvals from November's record low."
Meanwhile, the Bank's figures for unsecured lending, through credit cards, personal loans and overdrafts show a £403m increase in net borrowing in January, which is higher than December's figure of £271m. However, lending remains below the six-month average.
Archer said:"Consumer borrowing is extremely low by past norms and it is likely to be limited over the coming months by ongoing very tight lending conditions, as well as many people increasingly looking to rein in their borrowing."
Separate figures from the Building Societies Association showed savers withdrew more than they paid in in January, with societies recording net outflows of £390m.
Although last January saw £597m paid into accounts, the BSA's director general, Adrian Coles, said that after withdrawals were subtracted, outflows were not uncommon in the first month of the year.
"The withdrawal represents less than 4% of the total net receipts received by building societies in 2008," said Coles. "It is not unusual for building societies to have a net withdrawal in January, as savers take money out of their accounts to pay for Christmas expenditure. Outflows have occurred in six Januaries out of the last 10."
Coles admitted low interest rates had reduced the incentive to save, but said that despite this 1.2m accounts had been opened in 2008.
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