Context
As the 2010s drew to a close, both policymakers and the press raised concerns about rising levels of UK household debt, with some warning it could soon bring about the next recession. Although household debt levels remain high in absolute terms, when compared against total household income they are substantially below levels reached during the financial crisis of 2008. More importantly, reductions in the Bank of England’s Bank Rate, along with a decade of loose monetary policy, have helped to drive down the cost of debt.
Despite a decade of low interest rates, the burden of debt remains substantially higher for those households at the bottom of the income distribution. This growing level of financial fragility will have real effects on the lived experience of lower income households, as evidence shows that lower-income households with outstanding consumer debt tend to experience more financial stress than both their counterparts in the bottom income quintile who do not have any outstanding consumer debt and those in higher income quintiles who do.
The study
In this briefing note, the authors explore data from government (ONS Wealth and Assets Survey) and Bank of England (NMG Consulting survey, Financial Stability Report and Record) datasets, supplemented with a review of relevant media accounts and research studies. The paper examines how levels of household borrowing has changed since the 2008 financial crisis, and seeks to understand how levels and costs of borrowing differ across different households, according to income and household make-up.
Key findings
- Sharp reductions in the Bank of England’s Bank Rate during the financial crisis, along with a decade of continued loose monetary policy, have helped to drive a substantial reduction in average quoted mortgage rates. However, they did little to drive down average quoted rates on consumer products, like credit cards and overdrafts. This amplifies the differences in borrowing profile between lower- and higher-income households; in particular, mortgage holders tend to see the benefits of lowered interest rates, which skews to higher income households - those in the top income quintile are more than three times as likely to have a mortgage as those in the bottom.
- Typical consumer debt-to-income ratios remain more than three times higher for lower-income households as compared to their higher-income counterparts: in 2018-19, the median consumer debt repayment-to-monthly-income ratio for those in the bottom income quintile was 8 per cent, as compared to 5.4 per cent for those in the third income quintile and just 2.7 per cent for those at the top.
- The proportion of low-income households using some form of consumer debt rose by 9 percentage points between 2006-08 and 2016-19 – a far steeper rise than the 1 ppt rise (to 64 per cent) among high-income households.
- Consumer borrowing has grown more strongly for different types of households. Larger growth in consumer debt was recorded for younger households (aged 18-24 and 25-34) compared with their older counterparts. And while families with children have traditionally used consumer credit at a higher rate than those without, use of consumer credit grew most among households with two or more children: as of 2016- 19, more than seven-in-ten households with two or more children used some form of consumer credit. While the proportion of households headed by someone is either self-employed or unemployed using consumer credit fell, the proportion of full-time students, people with a disability or long-term illness and those in paid employment that use consumer credit all rose.
- Credit card use (with an average quoted interest rate today of 20 per cent, up from 15 per cent in 2008) among low-income households grew by 13 ppts between 2006-08 and 2016-19. The use of overdrafts (with an average quoted interest rate of 15-20 per cent) grew by 4 ppts.
- Lower-income households remain substantially more likely than their higher-income counterparts to experience high levels of debt distress. More than half (53 per cent) of low-income households with consumer debt reported difficulties in meeting accommodation costs in 2016-19 (compared with 31% of those in the highest-income quintile) and fewer than one-in-three (35%) felt they had enough money set aside for emergencies (compared with 65% in the highest-income quintile).
Recommendations
- Beyond regulating the market as it exists today, the authors recommend that policymakers should further investigate the factors that often drive households, particularly those towards the bottom of the income distribution, to unsecured and often costly, borrowing in the first place. For instance, this briefing note finds that consumer borrowing has risen most among families with children, those who are in work, and particularly among households on lower-incomes – and has an apparent association with their ability to pay for their accommodation or successfully handle a financial emergency.
- Bearing this in mind, the authors suggest that policymakers may want to consider the link between expensive borrowing and core living standards challenges, including insecure working arrangements, pay volatility and, increasingly, delays and difficulties with benefit payments. They also recommend that policymakers should broaden their focus on debt in order to include the growing role of council tax and utilities in pushing households into arrears.
Points to consider
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Methodological strengths/weaknesses: The bulk of this briefing note is an analysis of the data from established and relevant datasets from the Bank of England and the ONS. However, the report provides no methodological description on the criteria of selection for research studies and media articles used.
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Generalisability/ transferability: These findings should be used with caution in light of the recent coronavirus pandemic as it is likely that the financial landscape will have changed considerably for low-income households since publication.
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Relevance: The study would be of use to anyone with an interest in low-income households or in markets for financial products, utilities and services, including people in government, regulators, policy makers, policy implementers and support agencies.
