7  With a 10% deposit, that means they’d be buying a home worth 4.5 times their income. In short, the high levels of both mortgage debt and house prices in this country are a reflection of the high cost of housing in general. They are not the result of an addiction to debt or of reckless mortgage lending. 8  So Britain doesn’t have a high level of consumer debt. It doesn’t have a debt-driven housing market. And as we’ve seen, it doesn’t have rapid growth of credit overall. Debt Strikes Back isn’t yet screening again. But there are pockets of the galaxy where it may be. In the past year, outstanding car loans, credit card balances and personal loans have increased by 10%. Household incomes have risen by only 1.5% (Chart 8). On credit cards and personal loans, terms and conditions have become easier. The average advertised length of 0% credit card balance transfers has doubled to close to 30 months (Chart 9). Advertised interest rates on £ personal loans have fallen from 8% to around 3.8% today, even though official interest rates have hardly changed (Chart 10). These are all classic signs of lenders thinking the risks are lower. 6  Department for Communities and Local Government (2017) ‘English Housing Survey, Headline Report 2015-16’ 2 March. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/595785/2015-16_EHS_Headline_Report.pdf 7 The effective mortgage interest rate was last at 7% in 2001.
Personal Contract Purchase (PCP) plans accounted for one in five new car purchases in 2006. Now they finance almost four in five (Chart 13). At the aggregate level, PCP is the new cash purchase. The Financial Conduct Authority, which regulates car finance, has expressed its concerns about a lack of transparency, potential conflicts of interest and irresponsible lending in parts of the car finance industry. It will explore and address those practices. 9  The Bank of England’s role is to manage any risks to the wider economy from this growth. And those should be kept in perspective. On average, those taking out PCP plans tend to have higher incomes and more savings than the population as a whole. 70% of PCP borrowers have above average income (Chart 14). Arrears rates on banks’ car finance deals are lower than on other forms of consumer credit. Moreover, the true burden of car finance to households overall is much lower than it seems at first glance. 9  Financial Conduct Authority (2017) ‘Business Plan 2017/18’. https://www.fca.org.uk/publication/business-plans/business-plan-201718.pdf 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  PCP plans commit the car buyer to around three years of fixed monthly payments with an option - not an obligation - to make a final balloon payment at the end of that period, to own the car outright (Chart 15). If those optional balloon payments are excluded, this car finance debt accounts for only 1.2% of aggregate household income.