UK household debt swells past £2 trillion for first time ever
Family debt has swelled past £2 trillion for the first time ever in a sign Brits are whipping out their credit cards to fund spending amid the cost of living crunch, new research out today reveals.
Household debt is now nearly the same size as the entire UK economy (£2.2 trillion) and has been pushed higher by a big jump in risky borrowing over the last year.
The numbers, based on an examination of Office for National Statistics (ONS) data by consultancy PwC, illustrate the scale of credit families have amassed over decades to fund big ticket purchases.
Around £8 in every £10 of outstanding debt is tied to home purchases at more than £1.6 trillion, up more than four per cent over the last year.
Unsecured lending – which typically carries higher interest rates due to banks worrying about not being able to seize assets to reclaim their money if borrowers default – has climbed more than seven per cent over the last year to around £400bn, signalling Brits are using credit cards to offset the cost of living crisis eroding their spending power.
Higher debt isn’t necessarily a bad thing for an economy. If incomes are rising faster than debt accumulation, then households should be able to repay their debts. Credit is also crucial to fund consumer spending and business investment.
Private sector wage growth is running at around seven per cent, among the fastest paces on record, however that increase is being wiped out by prices rising 10.4 per cent over the last year.
The Bank of England has jacked up interest rates eleven times in a row to a post-financial crisis high of 4.25 per cent, making debt much less affordable compared to the last decade when rates were at record lows.
Rates have taken off over the last year
The recent turmoil in the global banking sector that has seen Credit Suisse pawned off to its biggest rival UBS in a shotgun marriage and Silicon Valley Bank collapse has raised fears banks could rein in lending to preserve capital.
Record debt levels may add to lenders’ caution for fear of piling too much debt on to household balance sheets.
PwC said a lack of credit availability is among consumers’ top concerns right now.
The firm surveyed consumers’ financial literacy, concluding most households lack a basic understanding of financial products.
Simon Westcott, strategy and UK financial services lead at PwC UK, said: “With inflation continuing to reduce how far the money in people’s pockets will go, plus household debt now exceeding £2 trillion for the first time, we wanted to understand how consumers are feeling about managing their personal finances.
“Whilst financial decisions can feel daunting to some people, we found that 88 per cent of consumers feel confident or very confident in making such decisions, suggesting relatively high levels of financial literacy.
“There appears to be a disconnect between these confidence levels and consumers’ actual understanding of everyday financial products with just 37 per cent of people correctly estimating the value range for a mortgage, and 31 per cent for a personal loan.”