Household debt is increasing
According to a House of Commons briefing paper issued in April 2017, when calculated as a percentage of household income, the average debt was estimated at 95% back in 1997 which then rose to a shocking 160% in 2008.
During the recession, banks were reluctant to lend and consumers were not inclined to take on credit and as a result the percentage declined to 140%. During the period 2014 to 2016 the increase in personal debt was matched by a similar increase in household incomes which is why it stayed at 140% until the beginning of 2016.
Recent figures have shown an increase in household debt which has risen from 3.9% in quarter 1of 2016 to closer to 5% for the rest of 2016. Growth in income did not keep pace which is why household debt as a percentage of household income increased slightly to 143.8% in Q3 of 2016.
Household debt includes mortgages, credit cards, personal loans and student loans.
So why is the government worried?
The concern is about families abilities to service their debt. February 2017 saw a 10.5% increase in unsecured debt. This is still low compared to pre-recession which showed growth in double digits.
The Bank of England’s Financial Policy Committee “FPC” lists that one of the risks to financial stability is that household debt “remains high by historical standards.”
Brexit and Uncertainty
The government are trying to be a bullish as possible about Brexit negotiations. But not only are ordinary people concerned about the outcome, heads of industry across the UK are holding their breath. The uncertainty is likely to result in individuals and businesses putting on hold any bold plans which is not good for the economy.
A stronger mandate for the Conservative Party may indeed provide greater certainty for the Brexit strategy. In the meantime, only uncertainty is certain.
The Office for Budget Responsibility “OBR” and other forecasters are predicting growth will slow in 2017 and 2018. They agree that businesses are likely to delay investment plans and that household incomes will be squeezed by rising inflation. This is likely to mean more households face difficulty in servicing their debt. To a degree this is already evident.
Increasing levels of debt becoming impaired by non stability
Credit Strategy reported in April that Lloyds Bank are holding onto a pipeline of retail loans and advances of £2BN which are in forbearance schemes. The retail debt includes current accounts and mortgages. In addition, the Lloyds annual results report for 2016 shows it also has impaired consumer debt which may or may not need to be written off of:-
- £307m of credit card debt;
- £277m of personal loans;
- £120m of UK motor finance loans.
As regards RBS, Credit Strategy reported that the bank has £5.2bn of ‘stock’ in personal banking which is in forbearance. RBS saw £834M of new flows into forbearance of personal banking products during 2016. As for bad debt levels, RBS had £31M of impaired credit card debt by the end of 2016, compared to £10m at end of 2015. The cost of looking after the impaired credit rose from £69M in 2015 to £84M in 2016.
So what is needed?
The debt industry now needs a new breed of debt solution provider that are FCA authorised, who can demonstrate a culture of caring, that help individuals who are struggling with problem debt to engage and improve their financial awareness in order to help repay their debts.
Struggling with problem debt
If you find you need some help with problem debt, get in touch. There a range of solutions depending on whether you are salaried or self employed or you are a director or shareholder of a limited company. Should you enter into a debt solution with us, fees will apply. If you would like our team to call you, please use our contact form.
All debt solutions need to be carefully considered. IVA’s are formal solutions and failure to keep to the terms can result in your IVA failing and you could end up bankrupt.
There is also free debt help and advice available through a variety of debt charities. For more information, we recommend you visit www.moneyadviceservice.org.uk.
The Debt Advisor is Authorised and regulated by The Financial Conduct Authority (reg no: 606669).