UK HOUSEHOLDS spent £900 more than they earned last year on average, fuelling fears of a new debt crisis just 10 years on from the global financial downturn.
According to new data from the Office of National Statistics, this amounts to £25bn in personal debt across the country, making Britons net borrowers for the first time since 1988.
More than £80bn was borrowed by British households in 2017, while just £37bn was deposited in bank accounts. Low interest rates and the availability of short-term funding were named as the primary factors in the rising levels of debt.
“We’re borrowing more and saving less partly because the interest rate – which dictates returns on money saved and the size of loan repayments – has been at or near a record low for the past decade,” read the ONS report. “The base rate set by the Bank of England is just 0.5 per cent, compared with almost 15 per cent in 1990, making financial conditions better for borrowers rather than savers.”
The ONS also found that lower-income households were more likely to build up debt than wealthier homes, with the poorest 10 per cent spending two and a half times their disposable income, on average, in the financial year ending 2017. The richest 10 per cent spent less than half of their disposable income.
“Low interest rates and easy access to credit cards and mortgages along with relatively cheap finance for cars has seen borrowing rocket,” said Shahil Kotecha, chief executive of property lender Pivot.
“The crucial thing for lenders is to properly underwrite their loans – looking at the underlying risks associated with a transaction and provisioning for the likelihood of these risks occurring. This, together with a plethora of low quality synthetic debt products, was essentially what brought down Lehmans and triggered the financial crisis. A decade on, we need to have learned these lessons.”
Meanwhile, the latest research from the government’s Insolvency Service has found that the number of Individual Voluntary Arrangements (IVAs) and Trust Deeds are set to grow by 17 per cent or more in 2018. This supports recent findings from TDX Group which claim that the average total of unsecured personal debt in the UK is between £24,000 and £26,000.
“The main drivers of the rise in individual insolvencies continue to be consumer need (fuelled by the current record levels of consumer borrowing), marketing by insolvency providers, and limited capacity in the debt advice sector,” said Richard Haymes, head of financial difficulties at TDX Group.
“With a likely Bank of England (BoE) interest rate rise on the horizon on 2 August, as well as the prospect of rising inflation and limited wage growth, additional support and advice for people living on low incomes or in financial distress is urgently required.
“Companies need to be aware of the extra pressures their customers may face and treat them appropriately when they are struggling to meet payments. We encourage individuals who are in, or feel they’re approaching financial difficulty to speak to their creditors as early as possible, as they can provide support to help manage repayments more effectively.”
Read more: UK consumers concerned over debt levels