BoE warning over levels of household debt

The Bank of England (BoE) has expressed concerns that household indebtedness poses a risk to the UK’s financial stability in a report.

BoE warning over levels of household debt

Total household debt in the UK amounts to £1.8trn, according to the central bank’s Financial Stability Report, with 75 percent of that figure – around £1.4trn – made up by mortgages.

Household debt, excluding student loans, amounts to 125 percent of UK household incomes, the BoE said – high by historical standards but “materially below” its 2008 peak of 144 percent.

BoE deputy governor John Cunliffe told BBC Radio Four’s Today programme the level of indebtedness was worrying, particularly if the economy’s performance deteriorates.

He said: “(Household debt is) quite high by historical standards but we worked hard to put those debt levels down. But within that there are areas that you do worry about. You worry about households that have high debt and could be badly affected in a recession.”

In its analysis, the bank warned that highly indebted households are more vulnerable to unexpected falls in their incomes or increases in their loan repayments. In an economic downturn, highly indebted households may cut back sharply on other spending in order to continue to service their debts, making the downturn worse.or lenders, resilience could be tested highly indebted households default on their debts in response to adverse shocks, resulting in losses for the lender.

It added the ability of both lenders and households to withstand an economic downturn will be particularly tested if underwriting standards have “loosened”.