FSA warns consumer debt spiralling out of control

One in five families are struggling to service their debts, the Financial Services Authority warned last week.

In a gloomy report on financial risk, the FSA warns that consumer debt is growing at unsustainable rates.

Average mortgage debt now stands at £39,669, the average second mortgage including buy-to-let is £47,583 and the average second charge is £11,504. Overall, UK consumers now owe £663bn to mortgage lenders and £155bn in other forms of debt.

The FSA says the risk of a property crash is growing as borrowers use unsustainable levels of house price inflation to go further into debt. Mortgage equity withdrawal and consumer credit now finance over 10% of household spending.

With 6.1 million families finding it “moderately difficult” to “difficult” to service existing debt, the FSA warns of several factors that could trigger a big fall in house prices.

These include increased unemployment, higher interest rates or the bottoming out of demand as affordability limits are reached. Uncertainty over the global economy and the threat of war in Iraq may also create downward pressure on prices.

FSA managing director Carol Sergeant, says: “There is a risk that when a correction comes, it could be rapid and disorderly. The results could be lower economic growth, hardship for consumers and in-creased credit risk for lenders.”

Buy-to-let investors may be particularly vulnerable. Average rental returns fell 1.2% between June 2001 and November 2002, while the popularity of interest-only loans in this market increases the risks of negative equity in the event of a downturn.