Mortgage holders cut back on unsecured loans

The Alliance and Leicester Borrowing Thermometer has shown that Brits are less in favour of personal loans and credit card debt, though mortgage borrowing has continued to increase. Credit card borrowing grew by 4 per cent last year, the slowest rate on record, while unsecured personal borrowing grew at its slowest rate since 1994.

Borrowers with mortgages have reduced their unsecured borrowings by 3 per cent (£197) since July 2006, while those without mortgages have continued to use their credit cards and take out loans. Although the pace has slowed, their average unsecured debt has increased by £98.

According to the research, Brits’ sensitivity to debt has reduced, with incomes rising and lower interest rates on loans and credit cards in the second half of last year. Alliance and Leicester says that base rates would need to reach 8.5 per cent before people experience the same financial strain as they did in 1990. at that time homeowners spent about a third of their income on interest payments, while the current figure is about one sixth.

At the same time, home owners have less appetite for house purchase and remortgaging to release equity. Eight per cent of those polled say they don’t need to cut back to afford the increase in interest rates, though the prospect of further rate increases makes them reluctant to move home or take additional money on their mortgage.

Alliance and Leicester’s Chris Rhodes comments: ‘It is a much bigger decision to buy a home than to remortgage your existing home - buying your first home is often the biggest decision of all. It’s not surprising that a large proportion of those who said they would buy did not actually take the plunge – particularly because limited supply means buyers have found it difficult to find suitable homes on the market and first time buyers, who do not have the advantage of equity behind them, have found high prices particularly hard to afford.’