Jonathan Davidson of the Financial Conduct Authority (FCA) has warned that households may be in ‘too deep’ with their debt.
This March 2018 report stated that consumer credit levels are close to a 2008 peak.
The FCA stated that it was far from certain that customers who could just manage loans now would be able to do so in the future. This would especially be the case if interest rates rise and customers have to pay more in interest charges possibly making their overall debt unmanageable.
The FCA have warned lenders that they would regulate businesses that are based on people being unable to clear their debts.
“There is a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads”, stated Mr Davidson.
He also explained that 1 in 5 mortgages today are still interest only. This is a problem when the mortgage term expires and the bank wants the whole of the loan to be paid back. This will force householders to sell their property or face repossession. Personally, I have advised a number of clients recently who have come to the end of their mortgage term, never having missed a payment but the banks have sought and gained a possession order at the courts as the loan had not been paid back at the end of its contractual term.
In the unsecured market we have seen a rise in loans to help finance purchases such as a car or simply to make ends meet towards the end of each month.
We are starting to see a rise in debt default rates. An interest rate rise or an economic downturn would certainly mean these default rates would increase significantly.
The FCA have carried out their threat to take action against firms whose business models are based on selling products to customers who cant afford to repay. The £14.8 million paid out by BrightHouse last year shows how seriously the regulator views this kind of business model.
The latest FCA warning follows on from the Bank of England warning in September last year that lenders were underestimating the hit they would take from consumers defaulting on a debt in a downturn.
The banks Financial Policy Committee said there were significant risk in the level of lending on loans, overdraughts and credit cards.
For advice on debts including mortgages and credit cards, please speak to Farleys Solicitors on 0845 287 0939 or email us. Our debt specialists can give you advice tailored to your situation.