Mortgage approvals plunge in August as full impact of higher interest rates starts to come through

The effect of higher interest rates on home purchases became clearer in August, as the amount of mortgage approvals in the month fell further, while the average rate paid on new deals rose sharply (Evening Standard composite)
The effect of higher interest rates on home purchases became clearer in August, as the amount of mortgage approvals in the month fell further, while the average rate paid on new deals rose sharply (Evening Standard composite)

The effect of higher interest rates on home purchases became clearer in August, as the amount of mortgage approvals in the month fell further, while the average rate paid on new deals rose sharply.

According to figures released today by the Bank of England, the number of approvals for home purchases fell to just 45,400, the lowest figure since February, when approvals plummeted in the wake of the mini-Budget. Though still higher than the low-point reached last year, monthly approvals are far below the average of the last decade, when around 70,000 was a typical figure.

The average interest rate paid on new mortgages, which had been only edging up in May, June and July, even as lenders rapidly increased their prices, rose by 0.16 percentage points to 4.82%. That meant the average interest rate for all mortgages, including those agreed years ago when interest rates were much lower, rose above the 3% mark, to 3.01%. Economists have warned of a ‘mortgage time bomb’ that will hit the economy as more and more homeowners’ low-interest fixed-rate deals expire and they agree new fixes at significantly higher rates.

Craig Fish, managing director at Beckton-based mortgage broker Lodestone, said low approvals in August are not uncommon, but he had seen little signs of the usual September improvement. “Transaction levels in August were down as they always are during the summer months,” he said. “The expected increase in business that is normally seen in September just hasn’t materialised. We’ve had lots of enquiries but there is a real hesitation form people to commit.

“It’s likely that until we see stability from the Bank of England, and lenders reduce rates further, the lack of purchase activity is set to continue until early in 2024.”

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said the rise in interest rates means house prices may fall by 10% from their peak.

Ashley Webb, UK economist at Capital Economics, said: “The drag from higher interest rates on bank lending grew further in August. And although interest rates have probably peaked at 5.25%, this effect will intensify as the Bank of England keeps rates at their peak until late in 2024 and the full impact of previous rate hikes is eventually felt.”