Bank of England orders banks to set aside £11.4billion to cover risk of bad debt boom
The BoE warned that credit card debt, personal loans and motor finance grew much faster than household incomes
HOME buyers are facing tougher borrowing rules when they apply for a mortgage, as the Bank of England raises fears of a debt boom.
The BoE today said it will tighten affordability tests for mortgage lending.
This means banks will have to make sure their customers can meet repayments in the event that interest rates increase to around 7 per cent, or the typical Standard Variable Rates (SVR) of about 3 per cent.
It comes as the BoE in its bi-annual Financial Stability Report raised fears over rapidly growing consumer borrowing on credit cards and car finance, which is rising by more than 10 per cent a year and far outstripping the growth of incomes.
The total amount of borrowing now stands at £198bn.
Policymakers fear that a consumer lending boom could, as a result, pose a bigger risk to banks' stability.
Britain’s major lenders today were told by the BoE to find a further £11.4bn in the next 18 months to protect their finances against the risk of bad loans.
Lenders are now expected to set aside £5.7 billion in the next six months, with a further £5.7 billion to be put away by the end of 2018.
The Bank said: "Lending conditions in the mortgage market are becoming easier.
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"Lenders may be placing undue weight on the recent performance of loans in benign conditions."
The measures were put in place to ensure that banks are protected from debt going bad and triggering a similar credit crunch like the one seen in 2007.
"As is often the case in a standard environment, there are pockets of risks that warrant vigilance," said the the Bank's Financial Policy Committee, which is led by Mark Carney, the Bank of England Governor.
PERSONAL INSOLVENCY: THE FACTS
PERSONAL insolvency isn’t just bankruptcy, we explain.
What is bankruptcy? If you’re in severe financial difficulty you can consider going bankrupt. It works differently depending on where you live in the UK. If you can apply for bankruptcy or a company or person you owe money to may petition on your behalf (if you owe them at least £5,000). The cost of bankruptcy is £680.
What is an IVA? An individual voluntary arrangement is an agreement between you and the firms you owe money to. It means you can pay off your debts at an affordable rate.
What is a DRO? A debt relief order is a way to have your debts written off if you have a low level of debt (less than £20,000). It costs £90. You can’t apply if you’re a home owner. Your DRO will appear on a public register and will affect your credit report negatively.
For more information, get free advice from Citizens Advice, StepChange or National Debtline
"Lenders may be placing undue weight on the recent performance of loans in benign conditions."
Hannah Maundrell, Editor in Chief of money.co.uk said the Bank of England is right to flag Brit’s “debt binge” as a big concern.
“Rock bottom interest rates have made borrowing cheap and we’ve definitely been making the most of it. The harsh reality is many households would struggle to pay back what they owe if interest rates went up.”
“Many are just about managing now and have little in savings to fall back on. Banks need to be prepared for this worst case scenario so they aren’t on shaky ground if rates go up.”
So what does it mean for borrowers?
The Bank of England's report focuses on lenders rather than borrowers but the message is essentially the same.
It is advising consumers to get ready for rainy days.
“The Bank of England’s financial stability report means more for banks than it does for borrowers right now. It’s the highest financial power telling lenders they need to be careful if they want to sail through Brexit unscathed," Ms Maundrell said.
“There’s no immediate change for anyone looking to borrow. The prep you need to do is the same.”
What you need to do know before borrowing money
WE spoke to Hannah Maundrell from Money.co.uk to get some tips :
- Borrowing as little as possible – and only ever for a specific reason
- Checking your credit report is correct before you apply
- Finding the cheapest way to get the cash you need – this could be a 0 per cent credit card or a low cost loan
- If you’re looking for a credit card go to a comparison site to check your chance of acceptance upfront so you can apply with confidence
- Being clear about what’s affordable for you now as well as if your circumstances change
- Always having a plan to pay back what you’ve borrowed upfront
- Treating credit card borrowing like a loan and setting up regular payments to clear it
- Use credit card comparison tools such as the one from or
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