Quantcast
Menu
Save, make, understand money

Household Bills

Average UK household to be in £10k debt by 2016

Kit Klarenberg
Written By:
Kit Klarenberg
Posted:
Updated:
24/03/2015

The average UK household will be almost £10,000 in debt due to personal loans, credit cards and overdrafts by the end of the next year – a new high in cash terms – according to research issued today by PwC.

Non-mortgage borrowing grew by nearly £19.7bn to £239bn last year, the fastest rate of growth in a decade – this equates to nearly £9,000 per household. However, increasing student debt is partially responsible for the rise.

PwC forecasts unsecured borrowing will rise by between 4 and 6 per cent annually in the next two years, leaving the average UK household with non-mortgage borrowing of close to £10,000 by the end of next year. Such a level of borrowing has no precedent in British financial history.

While record low interest rates are keeping borrowing costs low for the time being, the study warns that even a 2 per cent rise in rates could see some households struggle.

The research also indicates growing optimism on the part of Britons about the state of their finances. For example, 18 per cent say they are worried about meeting future financial obligations – a fall from 26 per cent two years ago; 26 per cent expect their pay to be frozen or decreased in the next 12 months – a fall from 48 per cent in the wake of the financial crisis.

However, despite this burgeoning confidence, PwC identified a number of ‘warning signals’. For instance, consumers aged 35-44 are progressively depending on credit to fund essentials; one in five say they borrow simply to make ends meet every month.

£9.1bn of the increase in non-mortgage borrowing last year resulted from student borrowing. PwC estimates graduates starting higher education post-2012 will leave with average debts of £45,000.

£4.2bn of the increase came from credit cards, while £6.4bn came from personal loans, overdrafts and alternative debts (e.g. payday loans and P2P loans). The average credit card balance stood at £1,021 at the end of last year, £39 lower than its all-time high five years ago.

PwC said consumer ability to stay in control of debts will be challenged in the near future, as the Bank of England base rate eventually rises from its current historic low of 0.5 per cent. In the next five years, total household debt to income ratio is projected to reach almost 172 per cent, exceeding the previous peak recorded in the months leading to the financial crisis.

A high level of financial illiteracy on the part of the general public is also a matter of grave concern, the report states. The portion of the survey that dealt with economic understanding found that only 21 per cent of respondents understood the true cost of a mortgage.

“Despite our survey revealing a relatively high degree of confidence among consumers about their ability to stay on top of their debts, the affordability of the UK’s household debt pile may come under pressure in coming years,” said Simon Westcott of PwC.

“As the total UK household to debt income ratio heads towards 172 per cent – exceeding its previous pre-crisis peak – and interest rates increase, consumers could begin to feel squeezed once again. This could undermine growth for lenders and feed through into a resurgence in bad debt.”