Home mortgage approvals drop to lowest since December 2023

The number of home mortgage approvals made to buyers dropped to a two-and-a-half-year low last month, figures show.

Experts said the impact of the war in the Middle East pushing up borrowing costs took its toll on buyer demand.

Some 56,200 mortgage approvals for house purchase were recorded in May, down from 66,000 in April and below the average of 63,300 over the past six months, according to the Bank of England's latest money and credit report.

It marked the lowest number of approvals since December 2023.

Approvals for remortgaging, which only capture remortgaging with a different lender, also decreased to 33,300 in May from 51,200 in April.

The drop in approvals for house sales, which are looked to as an indicator of future borrowing, came against a backdrop of rising mortgage rates following the outbreak of the US-Israel war with Iran at the end of February.

Many mortgage deals were pulled and average fixed rates ticked higher amid financial uncertainty prompted by the conflict in the Middle East.

Jason Tebb, president of OnTheMarket, said: "Approvals for house purchases, a useful measure of market activity as they indicate future borrowing, fell in May as ongoing political and economic uncertainty had an impact on buyer and seller decision-making.

"With the effective interest rate on newly drawn mortgages increasing to 4.22% in May, the impact of higher borrowing costs is also making itself felt.

"The continuing war in the Middle East, which has pushed up inflation and energy prices, has kept the cost of borrowing higher for longer."

Lucian Cook, head of residential research at Savills, said: "After a couple of unexpectedly robust months for mortgage approvals that have sat at odds with other weaker housing signals, May's figure provides something of a reality check.

"That said, over the past month we've seen competition return to the mortgage market alongside an easing in headline fixed rates, which should relieve some affordability pressure for new buyers."

Banks and building societies have been making cuts to their mortgage rates in recent weeks as swap rates, which are used by lenders to price mortgages, have fallen.

Rachel Springall, finance expert for Moneyfacts, said: "Mortgage rates have started to come down from their April peaks, so hopefully this will slowly build up momentum in the months ahead, and no doubt borrowers will be hoping for more stability in the market."

Rob Wood, chief UK economist for Pantheon Macroeconomics, said the data shows "few signs of major disruption to activity from the war in Iran" and that May's drop in approvals reflects a slowdown after April "when households tried to get ahead of the multiple rate hikes markets were pricing".

"Underlying demand for housing looks solid, in our view," he added.

Meanwhile, the Bank of England's latest data also showed that consumer credit borrowing was largely unchanged from April to May at around £1.7 billion, while net borrowing through credit cards decreased from £800 million to £600 million.

Households' deposits with banks and building societies increased by £5.4 billion in May, which was partly driven by an extra £3.1 billion put into Isas.

However, this was a significant decline from the £12 billion that flowed into Isas in April, around the start of the new tax year.