Mortgage Approvals Reach New High

Over the last two decades one factor has remained constant in the UK – we borrow far too much money on the ‘never-never’. If we take this as a given, two recent figures announced by the Bank of England make for very interesting reading. On the one hand, despite all expectations to the opposite, UK mortgage approvals rose at their highest pace in the last year.

On the other hand, UK credit card spending rose at its lowest rate for 12 years. Ideally this would mean that as a nation we have, almost overnight, become responsible credit consumers. However, somewhat worryingly, taken as one, the story that these two recent Bank of England figures are likely to be telling us is that Britons have wised up and are now moving away from expensive unsecured credit in search of cheaper secured credit. If that’s the case, the biggest question we may now need to be asking is: have Britons really become consumer credit savvy, or is it more likely that we are gambling with our homes in search of cheaper and bigger loans?

Let’s face some cold hard facts, debt levels in the UK are outrageous. According to the Bank of England’s own figures we borrow over a billion pounds a month in the UK! While we may well feel that we can afford to borrow these sums of money, the number of County Court Judgements (CCJs) issued in 2005 was at its highest level ever. Moreover, the number of Individual Voluntary Arrangements (IVAs) also stand at an all time record. It is also further estimated that over 9 million people in the UK now have serious enough debt problems that they can longer apply for mainstream loans. These facts clearly tell us a different story. After all, if we could afford to borrow all this money, are these the type of financial indicators we should be reading? The truth is, this move away from unsecured credit card borrowing to secured loan lending is unlikely going to result in these financial indicators remaining true, unless, that is, we continue to have problems repaying our debt.

So, apart from the lower interest rates being offered, essentially the difference between an unsecured loan and a secured loan is that if you borrow money on an unsecured loan and you cannot repay that loan, then the bank that lent you the money runs the risk of not being repaid the money they loaned you. On the other hand, if you borrow money on a secured loan, what you are effectively saying to the bank is if you are ever in a position where you cannot repay the loaned money to the bank, you agree to give up the security in order to repay the bank.

Now, given all of the above, if you have a home with a built-up equity value, would you really be willing to risk losing that home if you cannot repay the loan you borrowed because you wanted a cheaper interest rate and agreed to give the bank a secured loan; or would you rather be wishing you had borrowed the money on your higher interest rate unsecured credit card?

Richard Smith
1st August 2006