Largest Consumer Borrowing Jump for 10 Years
The latest figures from the Bank of England show that borrowing on loans, credit cards and overdrafts in the UK saw its highest annual jump for a decade in January, going up by 9.1% over the year.
Consumer borrowing rose by £1.6 billion in January, a £0.3 billion increase on the average for the past six months and the largest increase in a single month since November 2015 which itself was the largest jump since June in 2005.
Pantheon Macroeconomics’ chief economist for the UK, Samuel Tombs, said that these latest figures were evidence that “household have rediscovered their zeal for borrowing, indicating that concerns about over-indebtedness and financial stability are likely to resurface at the Bank of England soon.”
The surge in borrowing has caused Tom Drury of Arrow Global to express concern over the potentially high rates of defaulting we may now see over the next few years. Arrow Global themselves focus their business around purchasing consumer debt.
Drury said: “Record low interest rates over the past seven years mean that many consumers have been able to reduce their debt burden over the past few years. However, the current increase in consumer debt combined with interest rate rises over the years ahead will lead to rising debt defaults as we enter the next phase of the credit cycle: we forecast a 17% rise in households in default by 2020.”
Howard Archer of IHS Global Insight expressed a similar worry.
He said: “January’s spike back up in consumer credit may fuel concern that consumers are borrowing more and saving less to finance their spending. Increased consumer willingness to borrow has likely been a consequence of relatively high consumer confidence and extended low interest rates.”
These figures for unsecured consumer borrowing are coupled with high rates of mortgage lending in January. During the month, 74,581 mortgages were approved – the most since January 2014 – with a large amount thought to be down to buy-to-let landlords looking to pre-emptively prepare themselves ahead of the stamp duty surcharge due to come into effect in April. The value of the mortgages approved in January was just under £14 billion.
Mr Tombs said: “with the average mortgage loan-to-income ratio now at a record high, the case for raising interest rates to discourage households from accumulating debts they will struggle to repay continues to strengthen.”
Capital Economics’ Hansen Lu however placed more of the responsibility for this latest surge in mortgage lending on the pre-April rush, and said that from April onwards, the likelihood is that the market should moderate.
He said: “we expect that the mortgage market will be boosted up to April, as buyers bring forward their transactions to avoid the stamp duty surcharge on additional homes. This effect should be temporary, meaning that the upward pressure on approvals should ease off by the second quarter of the year.”