UK households are pulling money out of their savings accounts at the fastest rate ever recorded, drawing on rainy-day funds to weather the cost of living storm.
Figures from the Bank of England show households withdrew a net £4.6bn from banks and building societies in May, the highest level of withdrawals since it started collecting the monthly data in October 1997.
The figure suggests those able to do so are running down their funds to sustain living standards or to pay off mortgages or loans before needing to refinance at higher interest rates.
Richard Lane, the director of external affairs at the debt charity StepChange, said: “This is the latest in a long line of warnings that more and more people are struggling to cope with the cost of living.
“Whether it’s a sky-high energy bill, a sudden jump in mortgage payments or the gradual increase of the price of the weekly food shop, cost pressures are everywhere and eroding people’s financial headroom, leaving them more vulnerable to harmful borrowing and problem debt.”
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More than 2.4 million homeowners on a fixed-rate mortgage, or about a quarter of the market, are heading for a dramatic increase in monthly payments between now and the end of 2024 after 13 consecutive rate increases from the Bank to combat stubbornly high inflation.
Britain’s biggest lenders, including Nationwide, NatWest and HSBC, have scrambled to pull hundreds of cheaper deals in recent weeks and have pushed up the cost of a typical new two-year fixed rate mortgage to its highest level since the 2008 financial crisis.
The average two-year fixed residential mortgage rate rose to 6.37% on Thursday, up from 6.3% on Wednesday, according to the data provider Moneyfacts. The average five-year fix crept closer to 6%, hitting 5.94% on Thursday, up from 5.91% the previous day.
Thomas Pugh, an economist at the accountancy firm RSM UK, said households raiding their savings could reflect rising consumer confidence amid a scramble to book summer holidays and concert tickets in recent months. “But it seems more likely that households are using savings to pay down debt which has become much more expensive recently,” he said.
The Bank’s snapshot also showed that mortgage approvals rose slightly in May to 50,500 from 49,000 in April. Economists, however, say this is likely to prove shortlived given this month’s rise in mortgage rates.
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Andrew Wishart, the senior property economist at the consultancy Capital Economics described the situation as the calm before the storm,. “With mortgage rates now at the same level as in October and November last year, lending volumes will slump back to financial crisis levels in the months ahead,” he said.
Households built up savings to record levels during the Covid pandemic, amassing an estimated £200bn in extra deposits as lockdowns forced consumers to stay at home, while furlough supported the incomes of millions of workers.
Daniel Mahoney, the UK economist at Handelsbanken, said: “This provides strong evidence that households are dipping into excess savings built up during the pandemic to sustain living standards during the current cost of living squeeze caused by the high inflation environment.”
It was, however, mostly households in the top 40% of earners who experienced marked increases in saving, while the poorest fifth lost money. Many have no savings or little held in reserve, particularly among younger adults, those on lower incomes, and renters.
