UK Mortgage Approvals Rose Before War Triggered Rates Surge

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(Bloomberg) — 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.

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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 data showed on Monday.

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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 1 1/2 years after markets wagered that the Bank of England will hike interest rates to contain a resurgence in inflation caused by the war.

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The BOE figures also showed unsecured lending rose to £1.9 billion ($2.5 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.

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“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.”

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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.

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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.

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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. 

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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.

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“That gives plenty of scope to reduce saving to offset the hit from higher energy bills,” he said.

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(Adds details, mortgage rates, comment)

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