The latest figures from the Bank of England show in May, the population of the UK took on new, unsecured lending worth £16.2bn ‘ representing a growth rate of 14.6% over the previous year. Taking into account the level of existing consumer debt at the start of the period, and repayments made within that year, at the end of May, the total level of unsecured consumer debt in the UK was £147bn ‘ and that is on top of mortgage loans.
To put this into context, there are nearly 35.5 million adults in the UK between the ages of 18 and retirement ‘ in other words, the sector of the population most likely to have personal unsecured debts. At current borrowing levels, this means a debt of more than £4,000 per person within this age group.
Concern about the ease with which consumers can now pile up personal debt is often expressed in terms of whether they can afford to maintain them should a recession occur. However, having been involved in the non-conforming/sub-prime market for the last six or seven years, I am aware that affordability is only half the problem: the other half is manageability. As the rising level of bankruptcies and IVAs proves, debt management takes skill, training, and self discipline ‘ qualities the majority of us do not possess in large quantities. Further borrowing and rolling up debt can only make the problem worse, if basic financial management skills are lacking.
As mortgage advisers, this situation can be viewed as opportunistic. There are sound financial reasons for rolling up unsecured consumer debt into loans secured by either a first or second charge mortgage on the borrower’s residential property. The comparative interest rates alone make a strong case: if clients are paying 15% or 16% on their consumer debt and then convert it into a remortgage at between 6% and 7%, then surely they are saving themselves from paying unnecessary interest? It is true the APR drops considerably. But by rolling the unsecured debt into a remortgage, most people lengthen the lifespan of their overall debt several times over. This means the total amount paid in interest is considerably more.
Intermediaries will have a more substantial role to play, as the future regulatory framework begins to take shape
The lending industry will have to find ways to meet the challenge of the consumer’s appetite to incur higher levels of debt. Whether it’s through high property prices or high credit card spending, borrowers will be looking for ways of making their debt burden affordable.
John Prust is sales and marketing director of SPML