Non-mortgage borrowing grew by nearly £19.7bn to £239bn last year, the fastest rate of growth in a decade – this equates to nearly £9,000 per household. However, increasing student debt was partially responsible for the rise.
PwC forecasted unsecured borrowing would rise by between 4% and 6% annually in the next two years, leaving the average UK household with non-mortgage borrowing of close to £10,000 by the end of next year.
While record low interest rates are keeping borrowing costs low for the time being, the study warned that even a 2% rise in rates could see some households struggle.
The research also indicated growing optimism on the part of Britons about the state of their finances. For example, 18% said they were worried about meeting future financial obligations – a fall from 26% two years ago; 26% expected their pay to be frozen or decreased in the next 12 months – a fall from 48% in the wake of the financial crisis.
However, despite this burgeoning confidence, PwC identified a number of ‘warning signals’. For instance, consumers aged 35-44 are progressively depending on credit to fund essentials; one in five said they borrow simply to make ends meet every month.
Some £9.1bn of the increase in non-mortgage borrowing last year resulted from student borrowing. PwC estimated graduates starting higher education post-2012 will leave with average debts of £45,000.
A further £4.2bn of the increase came from credit cards, while £6.4bn came from personal loans, overdrafts and alternative debts (e.g. payday loans and P2P loans). The average credit card balance stood at £1,021 at the end of last year, £39 lower than its all-time high five years ago.
PwC said consumer ability to stay in control of debts will be challenged in the near future, as the Bank of England base rate eventually rises from its current historic low of 0%. In the next five years, total household debt to income ratio is projected to reach almost 172%, exceeding the previous peak recorded in the months leading to the financial crisis.
A high level of financial illiteracy on the part of the general public is also a matter of grave concern, the report states. The portion of the survey that dealt with economic understanding found that only 21% of respondents understood the true cost of a mortgage.
“Despite our survey revealing a relatively high degree of confidence among consumers about their ability to stay on top of their debts, the affordability of the UK’s household debt pile may come under pressure in coming years,” said Simon Westcott of PwC.
“As the total UK household to debt income ratio heads towards 172% – exceeding its previous pre-crisis peak – and interest rates increase, consumers could begin to feel squeezed once again. This could undermine growth for lenders and feed through into a resurgence in bad debt.”