A&L's latest Borrowing Monitor has shown that borrowers are cutting back on loan and credit card debt in response to an increasingly bleak financial outlook.
However with interest rates now unlikely to hit the 6 per cent level widely predicted in the summer, and with borrowing slowing, the lender predicts that household budgets will begin to look less stretched, especially if rates start to drop again.
Sean Murphy, director of strategic planning at Alliance & Leicester said: “Families are cutting back on their borrowing and their saving to help ensure they can afford higher mortgage and other household bills.
“Even though average interest rates on unsecured borrowings have actually fallen over the last 12 months, that has not been enough to tempt mortgage borrowers to take on more unsecured debt. Their family budgets have been under pressure and they have cut their cloth accordingly.”
Savings are also taking a hit, with people now saving just 3.1 per cent of their income - half the ten year average of 6 per cent. Savings wealth is increasingly concentrating into the hands of those without any borrowings.
Those with mortgages, are lagging increasingly behind the average. In January 2006, the average amount of savings of a mortgaged household stood at two thirds (64 per cent) of the average savings of homes with no mortgage to pay. Their savings now stand at less than half (48 per cent) of those without mortgages.
Since the first base rates rises in the summer of last year, households with mortgages have been less prone to take out unsecured loans than others. By the second quarter of this year, their borrowings actually fell, even though the overall market continued to see modest growth.
This trend is set to continue. Mortgage borrowers say they are 50 per cent more likely than the general population to reduce their credit card and other unsecured borrowing over the next six months.
Even before the impact of the last interest rate increase in July, disposable incomes were falling 0.7 per cent in real terms. The July rise put additional pressure on household finances. Fewer people now plan to buy their first home, trade up or increase their current mortgage, for example to pay for an extension or to invest in property.
Murphy added: “The continued growth in mortgage borrowing masked a big change in the behaviour of mortgage borrowers in other areas of their personal finances as they felt the pressure of higher rates. With the next move in base rates now seen as more likely to be downwards, this could bring them some welcome comfort.”
