Debt levels in the UK are very close to their September 2008 peak and a ‘significant’ number of households are in ‘so deep’ that even a small change to their circumstances could tip them in financial trouble, a city regulator has warned.
Talking to a conference for the credit industry, the executive director of supervision at the Financial Conduct Authority, Jonathan Davidson, said that although today’s conditions are different from ten years ago, worrying numbers of households were at risk.
‘There are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads,’ he said.
Debts: A ‘significant’ number of households are ‘in so deep’ that a small change could tip them into trouble
His comments come as the FCA found that default rates in the car finance market are rising, with the increase actually driven by consumers with the lowest credit score range.
Publishing its findings into the car finance market today, the FCA said car finance rose steeply in recent years, both in terms of new finance contracts, but this growth was mostly driven by those at less risk of defaulting.
The most recent figures by the Bank of England show consumer credit rose 9.3 per cent in the year to January, a small decline from previous months but still close to pre-crisis levels.
Davidson added: ‘The circumstances are different now than 10 years ago, but there are still worrying numbers of householders who may still be in too deep.
‘For example, one in five mortgages today are interest-only mortgages, many of which were made at the height of the credit boom to borrowers with little equity in their homes and not a lot of disposable income. And they won’t mature until about 2032.’
He also said that some arrears and default rates, while still low, were on the rise, warning that this could worsen if there was an economic downturn.
He said it was ‘far from certain’ that some customers who could just manage to afford loans now would be able to do so in future.
Car finance: Most growth in car finance was seen among customers with higher credit ratings
Last year the Bank warned that the biggest threat for the UK economy is consumer debt, with credit card lending, personal loans and car finance having all grown at a faster pace than wages in recent years.
The warning prompted the FCA to undertake an investigation into car finance.
It said that new car finance contracts accounted for 88 per cent of new car registrations in 2017 compared to 59 per cent in 2008. The average value of motor finance contracts also increased, from just under £13.5k in 2013 to just under £15k in 2016.
‘This growth was faster than the general increase in car prices […], suggesting that the typical motor finance customer bought a slightly more expensive car or put a smaller deposit in 2016 than in 2013,’ the FCA said.
Its findings also show that most growth in car finance was seen among customers with higher credit ratings and that those with the lowest credit score – and hence higher credit risk – accounted for a ‘relatively small’ share of car finance lending.
However, it also found that missed payments and arrears rates for consumer with the lowest credit score range – who account for around 3 per cent of outstanding motor finance lending – are relatively high when compared to consumers with lower credit risk and have increased more.
Adrian Dally, head of Motor Finance at the FLA, said: ‘We welcome the FCA’s update on its exploratory work in the motor finance market – particularly that most of the growth in the sector has been for those customers with higher credit ratings, that arrears and defaults remain low, and that prudential considerations are being robustly managed.’
SAVE MONEY ON MOTORING