Families are banking more money than they are borrowing for the first time in more than 20 years, a Bank of England report shows.
Charities said it was unsurprising that, at a time of high unemployment, households were being more prudent with their budgets Photo: GETTY
Households last year put £24 billion into deposit accounts and took out £20 billion in new loans. It is the first time since 1988, when the current records began, that savings exceeded new borrowing.
The statistics relating to families reflect a culture of austerity that has also dominated public finance policy. The Chancellor unveiled the biggest cuts to public spending for almost a century in this week’s Budget. Combined with £29 billion in annual tax rises, the Government’s own figures suggest that individuals earning £50,000 will be £1,600 worse off within two years, while the average citizen will be £400 worse off.
Leading economists said the recent recession – the worst for 60 years – meant households had become increasingly concerned about paying their debts.
Benjamin Williamson, a senior economist at CEBR, the consultancy, said: “Higher unemployment and increased risk aversion mean we will have higher savings as households rebalance their finances.”
Peter Spencer, the chief economic adviser to the Ernst & Young ITEM Club, said: “People are reducing their borrowings. It’s the combined effect of some families not being able to get credit and other families choosing to pay their debts off.”
Overall savings, including pensions and investments, rose last year from 2 per cent of household income to 7 per cent as families prepared for leaner times, according to the Office for National Statistics. This year, the savings ratio has risen further, to 8 per cent, a level not achieved since 1998.
At the same time borrowing has fallen dramatically.
With cheap credit readily available, borrowing hit an all-time high of £125 billion in 2004. The debt binge was driven by rising house prices as families remortgaged to release equity for holidays and other luxuries. At its peak, in 2007, net mortgage lending hit £108 billion.
Last year, by contrast, households borrowed just £20 billion, the lowest level since 1993.
David Hollingworth, of mortgage brokers London & Country, said: “There’s been a complete turnaround in the approach of borrowers. Rather than using mortgages as a cheap way of borrowing – effectively using their home as a piggy bank to fund their luxury purchases – they are now looking to pay down debt more quickly. They are tightening their belts amid concerns about higher interest rates in the future and questions over the employment market.”
The shift from loans to deposits has occurred despite the relatively low rates on offer in traditional savings accounts, which are now offering up to 3 per cent compared with 5 per cent before the crisis.
However, the Bank of England pointed out that savers were getting a good deal compared with the Bank Rate, which remains at a historic low of 0.5 per cent.
Charities said it was unsurprising that, at a time of high unemployment, households were being more prudent with their budgets.
But they warned that families still faced tough times ahead with the prospect of rising interest rates. Delroy Corinaldi, a director at the charity Consumer Credit Counselling Service, said: “Unemployment and pressures on the public purse will ensure the problem of over-indebtedness continues. The crux of the problem will not be about levels of debt but ability to repay, particularly if and when interest rates go up.”
Household finances are likely to be squeezed further because of George Osborne’s Emergency Budget. VAT will rise from 17.5 per cent to 20 per cent, while up to 700,000 more workers are to pay higher rate income tax after the threshold was lowered.
In April, ONS figures showed the average person’s wealth fell by £16,000 in the first part of the recession, a drop of 15 per cent.
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