Households are cutting back on their unsecured debt

Households with mortgages are cutting back on unsecured borrowing, according to the latest Borrowing Monitor from Alliance & Leicester. Mortgage borrowing has continued to grow rapidly, while the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994. Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%).

By contrast households without mortgages to pay have continued to take out loans and use their credit cards - although at a much slower pace than in the past - on average increasing their unsecured debt by £98.

Not surpisingly, the Borrowing Thermometer has registered a reduction in sensitivity to debt. Overall incomes have been rising and the interest rates on loans and credit cards reduced in the second half of last year. This reduces the financial burden of debt, since the cost of paying the interest on such borrowing represents a smaller proportion of people's incomes overall.

Base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when homeowners on average spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.

So whilst interest rates have risen by 0.25% to 5.25%, the sensitivity on the thermometer has also moved by 0.25%, as the danger level recedes, from 8.25% to 8.5%. In other words, base rates would have to rise further now before we hit the danger zone, so borrowers are more protected than they were.

The thermometer shows the total burden of consumer debt against the level of base rates for households with a mortgage. The base rate would need to rise to 8.5% for the cost of debt servicing as a proportion of household income to reach the 1990 level.

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