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Debt crisis

The warning is stark – the average person in the UK is £5,300 in

debt (not including the mortgage) and we need to take debt seriously,

according to a recent report from the FSA.

It goes on to warn that the national personal debt mountain of more

than £818bn has grown too fast and too high and suggests that as

many as 6.1 million people are struggling to meet their monthly

payments. Debt is becoming a big deal and brokers need to be aware of

how this could impact on their business.

There has been a huge growth in unsecured credit. The grim reality is

that credit card bills, loan statements and overdrafts have soared to

£158bn – 12 per cent higher than last year and a staggering 50

per cent rise in the past five years.

The average credit card debt stands at £2,203 while the average

amount borrowed from a store card is £1,498. It can come as no

surprise that another report shows that UK adults now borrow

£1.09 for every £1 they save – the highest ratio since

1990. But what can account for this huge change to a buy now, pay

later culture?

There is no doubt that the exposure to credit offers is much greater.

Every day there are tempting credit and personal loan offers spilling

out of the mail, magazines and newspapers, fuelled by deregulation

and cut-throat competition from new entrants into the market. But

perhaps debt has also subtly become part of our culture thanks to a

new generation of graduates who are thousands of pounds in debt

before they start full-time employment.

Secured lending in the form of mortgages is also showing worrying

trends. People are borrowing ever greater sums to get on the housing

ladder. According to the Council of Mortgage Lenders, the average new

mortgage is more than £85,000 compared with £46,440 just

five years ago. Mortgage multiples of four times salary are not

unusual.

Remortgaging to release equity, on the back of rising property

values, is also on the up. According to the latest statistics from

the Bank of England between July and September last year £12bn

of extra money was taken out by remortgaging borrowers.

But if interest rates stay low, is all this borrowing a real cause

for concern? The simple answer is yes. If, as widely predicted by

industry analysts, there is a drop in house prices, thanks to equity

release, it will not just be those with 100 per cent mortgages that

could find themselves in negative equity. Significantly, it will also

cut off one of the main avenues for consolidating debt.

Conversely, if interest rates rise, people will be spending more to

pay back debt. This all becomes doubly problematic if wages fail to

increase sufficiently to offset the inflationary effects of increases

in the level of council tax, NI contributions, motor, buildings,

contents and life insurance.

How will even a modest downturn affect brokers and financial

advisers? In short, what remains of any feelgood factor will

disappear, especially among the middle classes – the heartland of

brokers. With the falling stockmarket, endowment scandals and the

restructuring of the pension market, there is already little cheer

but with less money around the emphasis will shift from wealth

management to wealth restructuring and debt consolidation.

Debt is often the result of lifestyle changes, such as redundancy,

divorce and long-term illness. For instance, if middle-class Joe

Bloggs with a wife and two children in a detached house in suburbia

loses his job and is forced to accept a less well paid job, he will

find debts mounting fast.

Even with mortgage payment protection insurance, he might still have

to fund standing costs such as school fees, the running costs of two

cars, a big mortgage, and an outstanding loan to fund last years&#39

holiday.

Financial advisers need to understand more about debt counselling and

advice and how to educate their clients to make necessary changes in

their financial arrangements. All too often, they are pushed towards

a single product solution, but if the clients do not change their

behaviour, they will not solve their problems.

When money gets really tight, customers try to save money wherever

they can. For brokers this will be a good time to encourage

remortgaging, probably into fixed or capped-rate deals. Some

customers will need to consider restructuring loans, while others may

need to consolidate their debts as part of the remortgaging process.

Unfortunately, unless debt is dealt with quickly, people stop paying

into endowment policies and pensions and the bedrock of financial

management starts to unravel. This is where an holistic approach to

debt is needed.

The CML believes borrowers should be encouraged not to be complacent

about their continuing ability to pay their mortgage, given that

anyone who has taken out a loan since 1995 gets no Government help

with their payments for nine months if they lose their job. At a time

of low unemployment and low interest rates, it is easy for borrowers

to think this insurance is not relevant to them.

Despite an ongoing campaign by the CML and the ABI, only 22.5 per

cent of all mortgagees in the UK have mortgage payment protection

cover. But it is not just mortgage payment protection insurance that

is relevant. Brokers would do well to protect their customers&#39 core

financial products like mortgage and life policies, with income

protection. According to the latest Government Family Expenditure

survey, only 1 per cent of households in the UK take out income

protection insurance.

Juggling debt is a way of life. However, it makes everyone&#39s lives

more vulnerable to any lifestyle downturn. This means that more than

ever, people need financial advisers to help guide them through

responsible borrowing and good arrears management and to help them

assess effective measures for offsetting any potential risk.

In a changing market, advisers need to start looking at debt in a

much more holistic way.

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