Borrowing trends are diverging sharply in Britain, 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. 

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 on average homeowners 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. 

Key findings

• The appetite for unsecured borrowing is diminishing
• Mortgage borrowers have been reducing their credit card and loans by an average of £197, although households without mortgages have on average increased such borrowing by £98
• Incomes have been rising whilst the interest rates on credit cards and loans have been falling

Chris Rhodes, director of retail banking commented: “Consumers have shown an unprecedented appetite to reduce their unsecured borrowing, while their incomes have continued to grow and interest costs on their unsecured borrowings have fallen.” 

“This will have taken some of the sting out of the latest increase in base rates.”

“With the average mortgage borrower having well over £100,000 of equity in their homes, many of those who remortgaged will have taken the opportunity to pay down some of their unsecured borrowings – this may partly explain the decline we have seen in their personal borrowing and credit card balances.”