Britain’s household debt burden is set to rise again after years of falling, with figures this week expected to show borrowers paying off home loans at a sharply slower rate.
A total of £330 billion has been ploughed into paying off mortgages since 2008 as homeowners have taken advantage of record low rates to cut their debt. But a report from the Bank of England, due on Thursday, is likely to show repayments have dropped. The figures are affected by new mortgage approvals, which are up by a quarter, as well as by repayments.
Since 2009 homeowners have been paying off £11 billion to £12 billion from their mortgages every quarter, reaching a peak of £13.2 billion in the fourth quarter of 2014.
Worrying: Households are paying off less of their debt while spending more on credit cards, new figures suggest
Rates of repayments have since declined, falling to just over £10 billion in the second quarter of this year. The new figures are expected to show that the decline is continuing. Figures from the British Bankers Association last week showed that consumer credit soared in November to £713 million, from £422 million in October.
Howard Archer, chief economist at IHS Global Insight said: ‘There is a concern that consumers are borrowing more and saving less to finance their spending, which is likely a consequence of relatively high consumer confidence and extended low interest rates. This is something that the Bank of England needs to keep a close eye on.’
Speaking of the upcoming mortgage repayment data he said: ‘If it has slowed, it would mean mortgage activity has picked up overall, but it might also mean people are becoming less inclined to pay off what they owe or people are starting to withdraw equity.’
It could all mean that Britain is returning to the years leading up to the financial crisis when many homeowners treated their properties like cash machines, taking out equity to pay for renovations and new cars. There has been a huge rise in the taking out of second mortgages to fund big purchases or to consolidate other debts.
Broker John Charcol said the amount lent as second mortgages – also known as second charge loans – climbed nine-fold between 2012 and 2015. The broker has seen an 80 per cent increase in the amount lent in this way over the last year.
Second mortgages allow homeowners to borrow money without completely remortgaging and losing the low fixed rates they may have on their main mortgage.
Simon Collins, a broker at John Charcol, said: ‘Second charges have been the ideal solution for many borrowers looking to protect some of the very low rates that they’re on, as well as borrowers on interest-only mortgages who don’t want the payment shock of converting the whole loan to repayment.’
Interest-only mortgage deals fell out of favour following the 2008 crash and borrowers might find they have to switch to repayment when remortgaging.
Credit boom: The top graph shows how unsecured borrowing is steadily increasing, while savings are heading in the other direction. The bottom graph shows the growing number of credit card purchases
Mortgage boom: The number of approvals has increased in the last year according to the BBA
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