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Debt damage

The steep rise in unsecured debt has implications for lenders, especially banks

One of the league tables that the UK would probably prefer not to head up is the table of unsecured debt. Britons are responsible for one-third of all unsecured debt in Europe, according to figures from Datamonitor.

New lending on credit cards, loans and overdrafts in the UK reached 215bn last year compared with a combined total for continental Europe of 600bn.

Europeans have an average of 1,558 in unsecured debt while the British owe 3,175. No doubt, this is much to do with the banks’ enthusiasm for sending us unsolicited credit card applications in the post. There are now more than 50 million credit cards in circulation in the UK.

Almost one-third of individual unsecured borrowing is on credit cards – often at extortionate rates of interest of more than 20 per cent – compared with 1.6 per cent in France, for example.

There is some evidence that homeowners are swapping expensive credit card debt and refinancing with a cheaper remortgage. Latest figures from the British Bankers Association show very strong mortgage lending but net repayment of consumer credit.

Director of statistics David Dooks says: “This buoyancy in mortgage lending is contrasted by the trend in consumer credit, where credit card lending has shown a further decline – the fourth month in a row – while lending on personal loans and overdrafts was weak.”

Net mortgage lending in August rose by an underlying 6.2bn. This was 0.4bn higher than the 5.8bn rise in July and well above the monthly average of 5.4bn over the previous six months.

But unsecured personal lending fell by an underlying 0.2bn in August, reducing the average rise to 0.1bn over the previous six months. Loans and overdrafts rose by 0.2bn while underlying credit card borrowing fell by 0.4bn.

The Treasury select committee has already expressed concern at the rise of Britain’s total debt to 1.2tn while a YouGov survey this year suggested that nearly one million people had problems meeting their obligations every month and one in five adults – or eight million – had unsecured debt of more than 10,000.

With borrowing at such high levels, there are implications for all lenders but particularly the banks, which lend unsecured, as well as for society as a whole.

A recent survey from mortgage lender the One Account found that more than a third of homeowners face the prospect of working into retirement as they will still be paying off their mortgage.

Thirty-six per cent of homeowners questioned predicted that they will be at least 60 before they own their home and 43 per cent of homeowners claim that their mortgage prevents them from saving.

An increasing number of parents not only have to find 20,000 to fund a child’s university career but also an average of another 20,000 to help buy their offspring’s first home.

If the One Account’s findings are correct, the Government should be taking note of the implications for retirement savings. If parents are increasing debt, how many will be able to contribute to the new national pensions savings scheme and what will happen to the property market if millions of families are forced to sell off their home and trade down at retirement in order to get rid of their mortgage debt?

The One Account’s research shows that the size of the UK’s mortgage debt is preventing people from saving, with 43 per cent admitting that they are unable to put anything aside for their retirement.

For 25-29-year-olds, 17 per cent admitted that their mortgage repayments are preventing them from starting a family but perhaps the most worrying development – particularly for the banks and mortgage lenders – is that research from Sesame shows that a quarter of all pensioners are racking up debt, with no intention of paying it off. This is a complete change in borrowing culture.

Banks are used to students running up an overdraft and then disappearing abroad after they finish university but it will make pretty ugly headlines if they find themselves taking 85-year-old grannies to court for non-payment of debt or evicting them from their homes when they cannot keep up the mortgage repayments.


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