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Consumers concentrate on clearing debts

coin jarThe latest figures have revealed that the trend for paying off debt and taking a cautious approach on borrowing more money continued in February.

The results, from the British Bankers Association, pointed to an increase in the ‘safety-first approach’ being adopted by many consumers, with repayment of debts outstripping new borrowing levels by £305 million.

The director of statistics at the BBA, David Dooks, said the continuing fragility of the economy was being demonstrated by the public’s reluctance to acquire further levels of debt, as well as the increased repayment rates. However, despite the cautious mood amongst consumers, Mr Dooks predicted that volumes will rise as demand for finance increases, following ‘official schemes’ designed to ‘stimulate’ the economy.

One of the biggest schemes being backed by the government is the ‘NewBuy’ initiative, which is available to both movers and first-time buyers. The scheme allows home-owners to purchase a new build with a deposit of just 5-10%, rather than the usual 20%. However, whilst movers can participate, the scheme does not help existing properties to be sold and offers no assistance to those trying to buy an older house.

Unsecured lending from banks fell by 1.8% in the 12 month period up to February, whilst re-mortgage levels are currently at the lowest levels seen in 13 years.

Borrowers paid back £305 million more on loans, overdrafts and credit cards than new finance taken out during the month. The BBA said that the net repayment level was the highest seen in more than 12 months.

On credit cards alone, repayments were higher than new debt by £39 million. But despite the focus on repaying debt, new borrowing on credit cards still reached £7 billion, meaning levels have remained broadly the same for the last six months.

In the mortgages market, approval rates have been hit by reduced demand, as well as tighter lending criteria from banks. Despite interest rates continuing at record low levels and expected to remain that way well into 2013, the number of new re-mortgages hit a 13 year low. The number of new re-mortgage applications for February drooped to 18,147, whilst the number of new loans for house purchases also slumped to 33,103. The average amount approved for a new mortgage was £146,600.

Although interest rates are not expected to increase for a considerable length of time, some lenders have taken the controversial step of pushing up cash strapped homeowners’ repayments. Several more lenders are expected to follow suit over the coming months, another factor which could put downward pressure on the housing market.

The BBA admitted the market had seen a spike in house-buying activity, as potential home-owners scrambled to avoid the re-introduction of stamp duty, due to take effect after the Budget. In January, volumes had leapt to a 24 month peak of 38,000. However, although numbers had climbed at the start of the year, the BBA said they had dropped again to ‘normal’ levels during February.

Gross mortgage lending reached £7.9 billion during February, sliding by 1.9% compared to 12 months previously and below the average seen over the last six months. In addition, the amount of repayments being made by homeowners, meant that mortgage lending only rose by £545 million during February.

The chief UK and European economist from IHS Global Insight, Howard Archer, described the net lending figure for mortgages as ‘very low compared to long-term norms.’ He said that the slump may have been caused by home-owners trying to ‘take advantage’ of the rock-bottom interest rates to slash the outstanding balances on their mortgages.

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