The latest data from the Bank of England has shown that unsecured loans and lending has increased by 9.1% in January 2016, compared to January 2015. It constitutes the largest annual increase in a decade, and saw consumers borrowing on credit cards, unsecured loans, and overdrafts total £1.6 billion in January, compared to £1.1 billion the month before. When combined with an increasingly strong mortgage market, total lending to individuals amounted to £5.3 billion, from £4.7 billion over the previous six month period.
Samuel Tombs, Chief UK economist at Pantheon Macroeconomics, said the increased levels of borrowing coincided with the January sales, and that; “Households 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.”
This trend was also evident in November 2015, with Black Friday encouraging consumer spending, which ultimately saw unsecured lending and consumer debt rise to its highest levels in over 10 years.
Indeed, such figures have caused concern for policy makers and economists, who feel that consumer’s personal debt and especially unsecured loans may be spiralling out of control and could, affect the whole economic recovery.
Howard Archer, Chief Economist at IHS said: “January’s spike back up in unsecured 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. However, it may be significant that consumers did rein in their borrowing in December after November’s spike.”
Chief executive of Arrow Global Tom Drury warned of a risk of rising defaults.
“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.”
The Bank of England’s data also revealed an increase in UK mortgage approvals, which hit a two-year high in January 2016. Approvals were up from 71,335 in December 2015 to 74,581 in January, with loans totalling £13.9 billion the second highest level since December 2007. 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.”
Property Economist Hansen Lu stated that it seemed “fairly certain” that approvals were being boosted by landlords try to buy ahead of the 3% increased stamp duty rate for buy to let properties that comes into effect in April.
“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,” he said. “This effect should be temporary, meaning that the upward pressure on approvals should ease off by the second quarter of the year.”