Households dipping into savings due to cost-of-living crisis, report finds

The financial net built up over the last two years during the COVID pandemic will not help 17% of households who say they have no savings at all, according to a new report by the Yorkshire Building Society (YBS).

The 27-page ‘Inflation Nation’ report provided stark data on the state of household finances amid the cost-of-living crisis, caused by rising inflation, which now stands at 9%, soaring interest rates and ballooning commodity prices.

Aside from the 17% who said they were unable to save, nearly four in 10 savers (39%) said they had dipped into their savings in the last 12 months – a fifth (17%) by more than £1,000.

The report, which polled 4,000 households split into three age-based groups, noted that some may have benefited from a sustained period of capped spending during lockdown and been protected from the current wave of price increases.

But it added that a majority of UK adults were either not saving any more now than a year ago – so were saving less in real terms – or were not saving anything at all.

Read more: Nitesh Patel: Pandemic has transformed mortgage narrative

The report, released earlier this month, was followed by chancellor Rishi Sunak’s £15 billion package announcement yesterday (Thursday, May 26) to help households with the cost-of-living crisis.

The package will include a £400 discount on energy bills for every household and a £650 one-off payment to the poorest eight million people.

Nitesh Patel (pictured top), strategic economist at Yorkshire Building Society (YBS), welcomed the measures, saying they would also help to boost the economy.

He said: “We know that other countries in Europe have taken measures to help households with their energy bills, so this is obviously very helpful from an economic perspective, unlike the previous plan that was made available in March.”

Speaking to Mortgage Introducer, he referred to the YBS report, noting the difficulty many households were facing in the current economic climate.

“[The government’s measures are] really quite important because we know that there are a lot of people in this country who don't have any form of savings.

“If a large proportion of the population starts to reduce their expenditure in other parts of the economy, then I think we could be in a very, very difficult economic situation.”

The YBS report added that four in 10 (41%) of those surveyed expected their household outgoings to increase by between £101 and £500 each month over the next 12 months – with utility prices (70%), food and drink prices (60%), and fuel prices (58%) causing the most concern.

Read more: Supply vs demand: Which is higher in the UK?

Patel was asked if he thought mortgage demand would drop in the coming months, as an increasing number of households would have to make hard choices about whether they could afford to buy a home.

He said: “The first thing to bear in mind is that many households who have managed to build up their savings are still in a fairly reasonable situation, because the cost-of-living crisis has really only accelerated in the last three months, so they're still okay at the moment, and there are obviously still some very good deals out there available for mortgages.

“In terms of mortgage demand, it is still very, very strong relative to supply. And that's probably because mortgage rates are still very, very low.”

However, he added that demand could be hit if mortgage rates increased further.

“We know that in the current environment, people who are economising are probably not going to spend money on areas that are not really essential - and that could have a similar effect on housing.”

He predicted the first-time buyer market would also slow down (the report added that 29% of young people under 40 said the cost of living had impacted their ability to save for a deposit), but feeble house building figures could help to maintain a strong demand for homes.

He anticipated inflation could rise above 10% in the early part of next year, fuelled by Ofgem’s fourth energy price cap increase in October of around £800 extra and the expected rise in energy prices brought on by the EU’s embargo on Russian oil and gas. 

Consequently, he expected interest rates to rise to between 1.5% and 1.75% by the end of the year, although mortgage affordability measured by monthly payments relative to disposable income “is still very, very low compared to the pre-financial crisis.”