MONEY COMMENT
The £818bn Debt Gorilla

By Cliff D'Arcy
January 22, 2003

In a report released this morning, the Financial Services Authority (FSA; the UK's financial regulator), warns that we are borrowing too much and saving too little.

The FSA estimates that 10% of our spending is financed by debt, so we're living a long way beyond our means.

The problem, as the FSA sees it, is that low interest rates, high employment and booming house prices mean that, in the short term, we have easy access to credit and can service larger amounts of debt.

However, the FSA is worried that lower economic growth, slowing (or, more seriously, falling) house prices, and the possibility of higher interest rates will leave many of us struggling to meet our obligations.

The current rate of growth is rapid and unsustainable and, although credit arrears and defaults are low at present, the FSA expects them to rise in the near future.

The Figures

In the year to November 2002, residential mortgage borrowing rose by 13% to yet another record high of £663bn - that's two-thirds of a trillion pounds! Consumer credit (including personal loans, overdrafts, credit and store cards) rose even more rapidly - by 15.4% - to hit an all-time high of £155bn.

During the first nine months of 2002, the Council of Mortgage Lenders calculates that we borrowed £88.2bn for house buying, up one-fifth (20%) on the same period in 2001. We borrowed a further £30.5bn for re-mortgages and equity withdrawal, almost double 2001's figure of £16.9bn.

This is a serious problem, especially when many housing indicators are close to or already above the levels reached during the 1989-92 house-price crash. According to the FSA, areas of rapid, above-average house-price growth, including London, are most at risk.

Mortgage repossessions and arrears are low but, disturbingly, our credit card arrears have been creeping up over the last three years (because we prefer to default on our cards than put our homes at risk).

One in five (20%) of us possess a credit card with an average balance of £2,203, with one in seven (15%) having a personal loan, averaging £5,538. Almost as many of us (14%) have a car loan of around £4,439.

The FSA calculates that 6.1m families and individuals are having problems meeting their debt repayments. Those in most difficulty were spending almost one-third (a staggering 31%) of their incomes on repayments.

Other Worries

The FSA expects our ability to save in the future to be damaged by today's big mortgages and debts. The Association of British Insurers suggests that the "savings gap" (between what we need to save for a comfortable retirement and our current level of saving) is £27bn. Then again, IFA Promotion has put this figure at close to £70bn!

Finally, the FSA is warning us that historically low inflation means that we need to adjust our expectations of returns from long-term saving and investment products. Some investors may be buying complex "high income" products without fully appreciating the extra risk that these plans involve.

If you're out of your depth with debt and want to start swimming back to the shore, visit our Debt Centre or read what other Fools have to say at our Dealing With Debt discussion board.