Will Our “Borrowing Binge” Continue Over Christmas?
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Will Our “Borrowing Binge” Continue Over Christmas?

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Carl Shave Carl Shave | December 11, 2016

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It was reported in November that unsecured debt – principally credit card and overdraft debt – was rising at the fastest rate for eleven years. Bank of England figures show that credit card lending is at a record level, up by £571 million in the last month and by £1.4 billion overall this year. British households have £66.2 billion of outstanding credit card debt. Economists claim this is an indication of healthy consumer confidence, and indeed, the spending boom has kept the economy growing. However, as the figures suggest, many people are maintaining their spending levels by borrowing more money. The British Bankers’ Association reports that both credit card debt and mortgage debt are at record levels, with loan-to-income ratios the highest ever. There is concern about the pace of borrowing among consumer debt groups. Peter Tutton of the debt charity StepChange said: “With Christmas on the horizon, there is a real risk of adding to the millions of people already struggling with high levels of persistent debt.”

“One in Three Britons Expects to Pay for Christmas on Credit…”

According to a poll conducted by the charity National Debtline, one in three Britons expects to pay for Christmas on credit this year. Over 20% said they are putting their Christmas food on credit, and 10% admit to worrying about money in the run-up to Christmas. Against such indications that people are spending more than they are earning, what are the implications for 2017? In the light of the figures recently released, the governor of the Bank of England, Mark Carney, has indicated that the Bank intends to remain vigilant with regard to the issue of borrowing, not least because the Bank’s Stability Report showed that the overall ratio of household debt to income was 133% in the second quarter of 2016. The Bank’s report also confirmed that house prices are now, on average, 4.5 times the average income, a historically high ratio, leading the Bank to describe the outlook for the housing market as “highly uncertain”.

Will this Change “Risky” Lending?

The rules on “risky” mortgage lending – loans to people borrowing more than 4.5 times their annual income – will remain the same as for the last two years, meaning lenders may not lend more than 15% of their loan book to such borrowers. In addition, an element of the affordability test that must be applied to anyone wanting to take out a mortgage is to assess whether a homeowner could still afford the mortgage if interest rates rose by 3% at any time in the first five years of their loan. Mr Carney said: “This will help ensure that underwriting standards don’t slip from responsible to reckless as they have during past periods of consumption-led growth.” For now, interest rates are low and employment levels relatively high. But it should be acknowledged that the rise in prices that will almost certainly result from the fall in the value of the pound following the Brexit vote has yet to hit home for most people. The British Chambers of Commerce (BCC) predict that higher inflation is inevitable and that, combined with subsequent consumer caution plus high levels of uncertainty over the UK’s future position in Europe, will cause a slowdown in the British economy. The BCC forecasts growth of just 1.1% for the UK economy in 2017 – the weakest since the financial crisis. The Bank of England would seem to agree. Its report stated that in general the outlook for UK financial stability after the Brexit vote “remains challenging”. Furthermore, the Council of Mortgage Lenders (CML) predicts the market will plateau next year, and has revised down its expectations for lending in 2017.