UK consumers have “rediscovered their zeal for borrowing” according to economists, as latest official figures showed unsecured borrowing rose by 9.1% in the 12 months to January – the biggest annual increase for a decade.
Borrowing on credit cards, loans and overdrafts increased by £1.6bn during the month, the Bank of England said, compared with an average of £1.3bn over the previous six-month period.
This figure was the second highest since June 2005, and beaten only in November 2015 when early Christmas sales drew many buyers to the shops.
When combined with a strong month for mortgages, total lending to individuals rose to £5.3bn, from £4.7bn over the previous six months.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Households have rediscovered their zeal for borrowing, indicating that concerns about over-indebtedness and financial stability are likely to resurface at the Bank of England soon.”
Howard Archer, chief UK economist at IHS Global Insight, said that as in November the increase in consumer credit coincided with strong retail sales.
“January’s spike back up in unsecured consumer credit may fuel concern that consumers are borrowing more and saving less to finance their spending. Increased consumer willingness to borrow has likely been a consequence of relatively high consumer confidence and extended low interest rates.
“However, it may be significant that consumers did rein in their borrowing in December after November’s spike.”
Tom Drury, chief executive of Arrow Global, a firm which buys consumer debt from lenders, warned of a risk of rising defaults.
“Record low interest rates over the past seven years mean that many consumers have been able to reduce their debt burden over the past few years.
“However, the current increase in consumer debt combined with interest rate rises over the years ahead will lead to rising debt defaults as we enter the next phase of the credit cycle: we forecast a 17% rise in households in default by 2020.”
It said 74,581 loans worth £13.9bn had been approved for house purchases in the month, compared to an average of 70,221 over the previous six months.
Tombs said: “With the average mortgage loan-to-income ratio now at a record high, the case for raising interest rates to discourage households from accumulating debts they will struggle to repay continues to strengthen.”
Hansen Lu, property economist at Capital Economics, said it seemed “fairly certain” that approvals were being boosted by landlords try to buy ahead of the higher stamp duty rate that comes into effect in April.
“We expect that the mortgage market will be boosted up to April, as buyers bring forward their transactions to avoid the stamp duty surcharge on additional homes,” he said. “This effect should be temporary, meaning that the upward pressure on approvals should ease off by the second quarter of the year.”