Consumer spending remained stable in the second quarter and house purchase activity returned to pre-Covid-19 trends, but data indicates there are tough times ahead, according to UK Finance’s latest Household Finance Review, produced in collaboration with Accenture.
Total spending on credit and debit cards was up slightly in the second quarter at over £75 billion from around £72 billion in the first quarter. This is likely due in part to higher prices driving up average spend, including more expensive petrol and food. However, the volume of transactions also increased, particularly in the travel sector.
In addition, borrowing via personal loans, generally used for larger purchases, increased. With inflation forecast to rise, it is possible that some borrowing has supported earlier-than-planned purchases, locking in today’s prices before they increase.
Household savings built up through the pandemic largely remained stable but did not grow, reflecting higher costs constraining people’s ability to save money. Meanwhile, whilst overdraft levels rose gradually in the second quarter, at around £5.5 billion, total overdraft debt remains five per cent below the levels seen prior to the pandemic.
Households face constrained affordability when refinancing
For customers on fixed-rate mortgage deals, their monthly mortgage payments will not change. However, for the average borrower looking to refinance this year, increased inflation and interest rates mean they would see a substantial reduction to their disposable income.
On average, homeowners seeking to refinance can expect to see a reduction of just under 11 per cent of their disposable income. This would leave the average consumer with around one quarter of their net income left over after refinancing (Chart 1).
Chart 1: Wiggle room (disposable income left over after basic household expenditure and mortgage costs)
For households in the lowest income brackets, these borrowers could face a smaller range of refinancing options, as they may fall short of some lenders’ Financial Conduct Authority-mandated income-expenditure affordability tests. However, most customers will be able to refinance on the open market or refinance onto a new deal with their existing lender.
House purchases return to normal levels, but future mortgage demand dampens
House purchase activity returned to pre-pandemic norms in the second quarter – which is down on the spike in activity levels seen a year ago. However, looking ahead the same cost of living pressures impacting affordability for re-mortgagors are likely to dampen effective demand for house purchases in the coming months.
“Household spending was stable in the Spring, with increased personal loan borrowing. We understand that some consumers are making larger purchases earlier than planned to stay ahead of inflation.
“As we head into the autumn, the pressure on household finances will increase and we anticipate a drop in consumer spending and house-buying activity. Anyone struggling with their finances should get in touch with their lender as soon as possible to discuss support available to them.”Eric Leenders, Managing Director of Personal Finance, UK Finance
“Despite the fact consumer spending remains relatively stable, the impact of rising interest rates and inflation is starting to be felt across the UK. Financial literacy, especially of younger consumers, takes on a heightened importance during this challenging time and financial services can help their customers make informed financial decisions through the right combination of digital tools and human-centric services. Now is the time for lenders to continue to respond with empathy, using customer insights and data analytics to anticipate customer needs and take proactive action.”Krishnapriya Banerjee, a managing director in Accenture’s UK banking industry group