Tuesday, 16 August 2011

Paying down debt? Not bloody likely!


Failure to publish the numbers of people remortgaging and extending secured loans is hiding the truth that far from paying down debt, cash strapped home owners are borrowing more.

Zero-credit’s careful cross referencing of Financial Services Authority (FSA) and Council of Mortgage Lenders (CML) data shows that, on average, people with secured loans have increased the amount they owe by £13,696 since 2007, whereas unsecured borrowing - the only form of credit available to people not on the property ladder - has gone down by £19 billion since its peak in 2008.

Amazingly, the MLAR statitsics kept by the FSA provide total volume and value for all secured lending, but only the lending value for new house purchases. This makes it very difficult to see whether the continued increase in secured borrowing since 2008 is accounted for by people who are increasing existing debt levels or others who are buying more or more expensive properties.

As the CML publishes the value of average loan advances to all house buyers, we divided the MLAR new lending values 2007-2010 by the CML average advance values 2007-2010 to achieve a volume figure for new house-buying borrowers. We then calculated the per capita values for all secured lending, in order to compare these with secured lending less new house purchases. As the graphic illustrates, the difference is significant. 

We believe that the practice of not publishing essential market volume information justifies low interest rates erroneously. Our research also found that the industry's focus on debt-service to income ratios as a measure of over-indebtedness results in bias towards the maintenance of credit repayments that favours lenders. Moreover, we note from paragraph 4.6 of the OFT's Irresponsible Lending guidance that:

"The fact that a borrower may be able to 'service a debt' over many years simply by making minimum repayments does not, in our view, equate to being able to pay off a debt in a reasonable period of time."

Perhaps the Bank of England should take note?

We also have significant examples of BIS and the FSA inaccurately profiling people with low financial capability, equating vulnerability with low income and low academic attainment. Evidence from the Royal College of Psychiastrists leads us to conclude that consumers’ self–esteem, self-reliance and their capacity to overcome adversity is being undermined. 

“The Welfare Costs of Personal Debt – Who is Paying the Price?” is available on our website in summary format, or in full to Members and Subscribers. 


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