The Bank of England and the Financial Services Authority both expressed concerns this week that high debt levels could lead to trouble ahead.
Many borrowers binge on credit in the run-up to Christmas before suffering dire debt hangovers in the New Year.
The Bank reported an increase in the number of borrowers struggling to keep up with their monthly mortgage bills and said nearly 8 per cent were now having difficulties.
Similarly, the Financial Services Authority warned about the pitfalls of relying on house price rises to pay off mortgage debt rather than having a repayment strategy in place. Almost a quarter of all new mortgages are on an interest-only basis.
Citizens Advice told The Daily Telegraph of a "worrying trend" among people with rising housing costs – including council tax – and utility bills. A spokesman said that while its debt inquiry figures during the past decade showed that most problems were with credit cards, overdrafts, personal loans, and store cards, more recently there had been a "rapid" increase in housing-related debt.
"The three so-called priority debts are housing, council and utility debt," she said. "If people are getting into debt in those areas then they are risking losing their home, services being cut off and possible prosecution – at least for non-payment of council tax."
Figures from the Department of Constitutional Affairs show nearly 35,000 mortgage repossession actions were entered into during the third quarter of this year, up 15 per cent on the previous year. The last time the number of actions initiated was so high was in the second quarter of 1992.
"It would be misleading to say that it is anything like the crisis of the late Eighties and early Nineties," said Citizens Advice. "But it is a worrying trend and an indicator of where people are beginning to struggle. We are concerned that this trend may become more of a problem for more people."
Many homeowners have increased their mortgage, believing that the increased equity stored up in their homes will keep them out of trouble. It is a resource that many have tapped into to pay off large chunks of debt elsewhere, such as credit cards and store loans.
Experts say many borrowers are deluding themselves and still need to pay off the debt. Mark Dampier, from independent financial advisers (IFAs) Hargreaves Lansdown, said there was nothing wrong in having some debt but added that just because house prices had gone up, it didn't mean that you could borrow more money.
"Your house is not free money or a bank where you can draw out cash and never have to pay it back. Doing so might only make things worse in the long run.
"There is a huge amount of debt. If there were a downturn in the stock market and that collapsed then the housing market could follow suit."
Borrowers seem to be finding new ways of justifying their debt, such as a supply and demand imbalance in the housing market that they hope will keep house prices high. But some experts say this is an illusion and that the realities of debt will hit home among borrowers if there is a recession.
Mr Dampier forecast: "Many people will come down to earth with a bump that is extremely painful."
To avoid that, he suggests building up an emergency fund, drawing up a budget and paying for everything in cash rather than relying on a credit card. Many advisers recommend holding the equivalent of three months' pay in cash deposits. Bonds – whether issued by the British Government or large companies – are not a suitable substitute for cash as they are not risk-free and because the price for which they can be encashed may fluctuate.
A list of all your monthly income and outgoings will give you a clear idea of whether you are living beyond your means. This household budget will also enable you to identify areas where you could cut expenditure most easily.
Getting into the habit of paying with cash will remind you of the real cost of each purchase, in contrast to plastic which can make buying that extra present or bottle of wine seem dangerously painless.
The sooner heavy borrowers take a reality check the better. Debts that are affordable at current interest rates could prove excruciating if interest rates increase substantially. Some examples of how homebuyers' monthly mortgage costs would be affected by interest rate rises are shown on this page – and the bar chart above demonstrates that average standard variable rates so far this decade are near their lowest levels in half a century.
Nick Gardner from IFAs Chase de Vere said it might be wise to consider remortgaging into a cheaper deal sooner rather than later. "People have been taking out discount and tracker rates as there have been periods when they looked much cheaper than fixed rates.
"But with two interest rate rises in the past six months, the amount of interest these people are paying has already increased, so a lot of people should think hard about whether or not they would be able to afford many more rises."
Many commentators believe there will be a further rate rise in the New Year, and they suggest it is a good time to look at fixed mortgage rates. James Cotton at mortgage brokers London & Country said changing attitudes among lenders should also help prevent a repeat of the trauma of the early 1990s. "Repossession is in no one's interest, lenders included.
"The most important thing is not to put your head in the sand, so get in touch with your mortgage lender as soon as you experience or envisage problems. Doing so will mean the lender should be much more willing to work with you rather than against you."
Mounting credit card debt remains a concern for many borrowers. Latest figures suggest habitual users of plastic could take as long as 10 years to pay off their borrowings if they only ever make the minimum monthly repayment. That is how long it would take someone to pay off the average Christmas credit card spend of £360 with a typical APR of 15.9 per cent, according to the comparison website moneysupermarket.com.
Robert Kenley, of moneysupermarket.com, said: "To avoid a 10-year financial hangover, Brits should make some fiscal New Year's resolutions."
Top of the list of recommendations is transferring existing debt to a 0 per cent balance transfer card. It is a popular move for both more mature borrowers and less experienced cardholders.
Perhaps surprisingly, accountants Deloitte claim that people aged over 55 are much more likely to use credit cards to pay for Christmas than younger age groups.
"Contrary to common perceptions, our research shows that older generations are more inclined to hit the plastic than younger people," said Nick Sandall, head of retail banking at Deloitte.
"This is perhaps a reflection of increased financial awareness in younger generations while posing the question of whether older people are becoming more inclined to crack into the nest egg and spend their kids' inheritance."
Evidence of the ongoing love affair with credit cards is supported by research by moneyexpert.com, which claims that one in 17 British adults has five or more credit cards.
Sean Gardner, chief executive of MoneyExpert, said: "It is healthy if people are switching cards and clearing debts but people are kidding themselves if they rely on moving from one card to another just to avoid repaying their debt.
"Credit cards are becoming our Achilles' heel. Borrowing has become so cheap and minimum payments are so low that we feel absolutely no obligation to pay the money back as soon as possible. An interest-free attitude can be very dangerous."
Not everyone believes consumers are failing to register the dangers of spending beyond their means this Christmas. Research by website iva.co.uk – which provides advice on individual voluntary arrangements, a relatively recent alternative to bankruptcy – says that a fifth of British adults have reduced the amount they plan to spend this Christmas while one in 10 adults intends to borrow less or nothing at all.
A company spokesman attributed the change in attitude to borrowing to the latest interest rate rise, which had "a severe impact" on many people's spending and borrowing habits.
Borrowers are advised to take steps to insure their ability to repay their debts with payment protection insurance. Most people insure their home, holidays and car but few insure their ability to pay for them. Accident, sickness and unemployment cover as well as critical illness policies should be considered.
Malcolm Tarling, a spokesman for the Association of British Insurers, said: "People underestimate the risk of becoming seriously ill and being off work for a long period of time.
"The most important step is to make sure that if you have debt you pay it back while you have the money. But you also need to have a fall-back position so that the debt can be continued to be paid if you become ill and you lose your income."
Source: Myra Butterworth, Telegraph
Please post any news stories about IVAs here:
http://www.iva.co.uk/forum/default.asp?CAT_ID=5
