Mortgage borrowing has continued to grow rapidly, while the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994.
Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%). By contrast households without mortgages to pay have continued to take out loans and use their credit cards – although at a much slower pace than in the past – on average increasing their unsecured debt by £98.
The Alliance & Leicester Borrowing Thermometer has registered a reduction in sensitivity to debt. Overall incomes have been rising and the interest rates on loans and credit cards reduced in the second half of last year. This reduces the financial burden of debt, since the cost of paying the interest on such borrowing represents a smaller proportion of people’s incomes overall.
Base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when on average homeowners spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.
So whilst interest rates have risen by 0.25% to 5.25%, the sensitivity on the thermometer has also moved by 0.25%, as the danger level recedes from 8.25% to 8.5%. In other words, base rates would have to rise further now before we hit the danger zone, so borrowers are more protected than they were.
The thermometer shows the total burden of consumer debt against the level of base rates for households with a mortgage. The base rate would need to rise to 8.5% for the cost of debt servicing as a proportion of household income to reach the 1990 level.
Key findings
The appetite for unsecured borrowing is diminishing
Mortgage borrowers have been reducing their credit card and loans by an average of £197, although households without mortgages have on average increased such borrowing by £98
Incomes have been rising whilst the interest rates on credit cards and loans have been falling
As a result, despite the increase in base rate in January, the Borrowing Thermometer has shown a decrease in the sensitivity to interest rates
Before and after...
The Borrowing Thermometer has registered an increase of 0.25% in the level base rates would need to reach – from 8.25% to 8.50% – as well as the increase in actual base rates from 5% to 5.25%.
Other changes
Although the mortgage market has continued to grow, since last summer home owners’ appetite for house purchase and remortgaging to release equity have fallen. In the latest survey, 8 out of 10 of those with a mortgage say they can afford the increase in rates without cutting back. However, borrowers also say that the prospect of further interest rate increases will make them even more reluctant to move home or take out more money on their mortgage.
Chris Rhodes comments: “It is a much bigger decision to buy a home than to remortgage your existing home - buying your first home is often the biggest decision of all. It’s not surprising that a large proportion of those who said they would buy did not actually take the plunge – particularly because limited supply means buyers have found it difficult to find suitable homes on the market and first time buyers, who do not have the advantage of equity behind them, have found high prices particularly hard to afford.”
Looking ahead, slightly fewer (9.9%) expect to have higher mortgage borrowing in six months’ time. Similar numbers hope to buy their first home as before, but the appetite to trade up the housing ladder is much diminished. Almost half as many respondents expect to move to a more expensive home over the next six months compared to those in July.
When asked how a further rise in interest rates would affect their plans, two thirds of those expecting to trade up said they would put their plans on hold. First time buyers were even more likely to be dissuaded while the majority of those planning to remortgage and borrow more money felt that higher rates would not make it worthwhile.
Chris Rhodes commented: “We have entered 2007 with a reduced appetite for borrowing and house buying since last summer. Our latest survey suggests that another base rate rise could cool the housing market further.”
