Record rise in demand for borrowing before Christmas

A pre-Christmas spending surge saw appetite for borrowing on credit cards and personal loans rise at the fastest pace since records began in 2007, figures show.

As the economy continues to recover, the Bank of England’s survey of banks and building societies found that demand for these types of credit is expected to increase further in the next three months.

The report found that in the three months to early December, demand from households for both credit cards and personal loans saw its biggest upswing since the quarterly Credit Conditions Survey started in spring 2007.

Lenders reported that their changing appetite for risk helped to drive an increased availability of these types of credit. They said they have embarked on marketing campaigns which have been successful in drumming up business, they have loosened their credit scoring criteria and the proportion of applications being approved has increased.

The study follows a report from the British Bankers’ Association (BBA) which said last month that the annual growth in consumer borrowing using credit cards, overdrafts and personal loans has recently been increasing at the fastest rate seen in six years.

The BBA put the increase down to both an easier borrowing climate and improving household finances.

The Bank’s findings also suggest that the ultra-low rates being offered on mortgages are likely to continue in the coming months – although people with very low deposits saved could have a tougher time securing a deal.

While mortgage availability has seen a slight increase generally in the last few months, lenders have become less willing to hand out mortgages to people with deposits of less than 10%, the report found.

Some lenders said they have also introduced further policies to restrict lending at high loan-to-income ratios. The maximum sum that a mortgage lender will lend in relation to someone’s income is expected to fall slightly further in the first three months of 2015.

Lenders expect demand for mortgages from home buyers to increase slightly over the coming three months.

In the final quarter of last year, demand for mortgages for house purchase decreased “significantly”, the Bank said, recording the sharpest contraction seen since 2008. This took lenders by surprise, as they had been predicting a rise in demand in the final months of 2014.

There was evidence of a slowdown in the housing market towards the end of 2014, amid signs that some buyers were baulking at sellers’ asking prices and that they were also considering the impact of possible interest rate rises on their mortgage payments.

But some experts have suggested that the complete overhaul of stamp duty unveiled by the Government last month could boost property market activity in early 2015 as more people will be encouraged to buy and sell homes.

In signs that the strong competition between lenders seen in recent months to slash their mortgage rates to some of their lowest ever levels is set to continue, the Bank said that lenders expect their profit margins on home loans to narrow further over the next three months.

The Bank’s report also found that lenders expect credit availability for small firms to weaken in early 2015, while remaining broadly unchanged for medium-sized businesses and large corporates.

The report said that “as has been the case for much of the past two years”, lenders reported that their profit margins on loans to medium-sized and larger firms fell significantly in the final months of 2014, while their profit margins on loans to small businesses remained unchanged.

Adam Marshall, executive director of policy and external affairs at the British Chambers of Commerce (BCC), said: “Unless financiers, regulators, ministers and the Bank of England are willing to take a risk to help new and growing firms, only the usual suspects will have access to growth capital in the UK – meaning that a lot of great business ideas will either move abroad or fail to take off.”

The BBA’s chief economist, Richard Woodhouse, said: “Banks expect the property market to pick up again slightly in the new year, with lenders offering increasingly competitive offers to attract customers keen to borrow to buy homes and other purchases.

“There are positive signs on the business lending side too, with a significant increase in demand from medium-sized businesses.

“The cost of lending is also falling for many businesses. That’s good news for the wider economy as that is the sort of borrowing that can help fuel the recovery.”

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