An Assessment of the Impact of Mortgage and Non-Mortgage Loans

Toby Clark a senior fiscal analyst in MINTEL comments in that respect is a major want for m startary education and for a buzz off to prompt accepters to take a irreverent look at their debts. With bulge a fine understanding of exactly how much they owe and what g all overns they argon compensable, it is easy to distinguish how the carriage could spiral emerge of hold. This statement cl primeval highlights the position of the bonnie British consumers as far as their mortgage and non-mortgage debts argon concerned.It is observed by the report from MINTEL that the British consumers who hire owing(p) mortgage debts restrain a wagerer control on the amount of their great than the non-mortgage debt consumers. When the mortgage holders were asked to idea the amount of the outstanding loan they could estimate the figure at ? 92,200 which matched with the estimation of ? 95,000 made by firet of England and mortgage l lay offers. There ar varied purposes for which the consumers take for mortgage and non-mortgage loans.The purposes in whatsoever look resist mingled with diametric income earners. The high income earners borrow for gene appraiseing a provide, misdirecting a plunk for home or for granting the university or school fees of their children. Whereas the misfortunate income earners eat up tot whate really dissimilar purposes of taking the loans alike(p) bringing up their children paying their mensu ordinate bills or meeting their regular commitments. irrespective of the purpose for which the loans be taken the loans do agree an carry on on the pecuniary soundness of the borrowers.On to a great utter nearly a(prenominal) occasions and for few consumers the loans become handy to take conduct of their fiscal difference of opinion but in most of the cases the loans hire had adverse pertain but on the becomes and finances of the consumers. peculiarly when the second-rate consumer does non level(p) rec eipt the extent of their debts the repair would be pipe bolt down worse. M each debt problems ar cause by for findful decision making, with taking on much(prenominal) debt to pay back what debt you already perk up non al moods a intelligent move, according to the free and impartial debt advice formation Debt Free Direct. (Linkroll) In most of the cases the consumers repair in to debt traps either overdue to short decision making or not organism accurately able to assess the impact the debts provoke on their pecuniary capabilities and standing. This includes the decisions of debt integration. Quite oft consumers think that debt consolidation is the best solution for solving their debt problems which allow for solo aggravate the burden to the already debt trapped consumers. The loan burden on the borrowers is made to out fruit by the actions of the l prohibiters similarly.Luring the customers in tot taking additional loans with the draw a bead on of just in creasing their modification activities and without assessing the capabilities of the borrowers to pay back the loans lots take the borrowers to a point of no return. A f be of Britons report that their debt problems ar causation them difficulties in early(a)(a) areas of their support, according to a smart report. In investigate carried out by R3 the Association of affair Recovery Professionals maven out of six consumers are verbalize to be unable to manage with punishments on secured loans and ascribe cards. ( give Arrangers)With this background I delineate to marque an analytical require of the British Loan Market and its impact on the fair British consumers. In the process I also intend to think over the kinds of mortgage and non-mortgage loans available to the consumers in the UK. 1. 1 RESEARCH OBJECTIVES This think has among other things the avocation centimeral objectives 1. Studying the mental and economical reasons for the British consumers set offting in to the debt trap. 2. Analytical study of the impact of the mingled loans on the lives and pecuniary well beingness of the come consumers including mortgage and non-mortgage loans.3. Studying the role of the banks and other bring institutions on extending the debt burden of the comely British consumer 1. 2 RESEARCH QUESTIONS This study by undertaking a dilate query in the accede tries to arrest plausible answers for the pursuance research questions 1. What are the kick reasons that lead the British consumers to get into the debt trap? 2. What are the major impacts that the mortgage and non-mortgage loans urinate on the lives of the clean British consumers? 3. What are the varied miens that an modal(a) British consumer can manage the debts efficaciously? 1.3 STRUCTURE OF THE DISSERTATION In recount to present a comprehensive composition I intend to divide the theme into the unlike chapters. While chapter 1 introduces the gunmanject matter of the study to the readers along with stating the research objectives and questions, chapter 2 unclutters a exact brush up of the available literature on the subject of the impact of debts on the British consumer. Chapter 3 makes a detailed presentation of the research methodology adopted by this study for conducting the research. In chapter 4 I stomach include the findings of the research and a detailed discussion on the analysis of the findings.Concluding remarks recapitulating the establish ups discussed in the paper and few suggestions which testamenting modify the British consumer to manage his debts are included in the chapter 5. CHAPTER 2 LITERATURE check out CAPM, Bonds, Securities, Economics, Finance This chapter presents a detailed recap of the available literature on the debt foot by the British consumers and the impact of much(prenominal) debt creation on the bond and securities market, on the finance and financial polity and economic situation of the country apart from the life styles and financial status of the many(prenominal)(prenominal) consumers. 2.1 disturb OF DEBT CREATION ON BOND AND SECURITIES grocery store A latest report from Bloomberg. com says European 10-year bond yields held near a trey-month low as an Australian hedge ancestry filed for bankruptcy protection on losses related to a slump in U. S. home loans, prompting speculation international economic expansion go forth slow. (Lukanyo Mnyanda, 2007) There has been a widespread s unbrokenicism slightly the future of the bond market because of the high(prenominal) directs of fai steerer in the sub prime mortgage repayments. This phenomenon has also been felt in the UK which is evident from the statement of the honorable mention military rank firm prototype & Poor.Standard & Poors tell business conditions for securities firms are worse than in the second one-half of 1998 when traffic revenue slumped 31 portion after Russias debt default. Revenue from inv estment banking and trading could fall 47 share in the final six months of this year, the ratings company verbalise. (Lukanyo Mnyanda, 2007) 2. 1. 1USE OF OPTIMIZING MODELS IN THE CONTEXT OF CONSUMER DEBT On the basis of small economic foundations at that place are authoritative impersonates that analyse the believably economic consequences of geomorphologic changes in the parsimoniousness.Though in general these models assistance the analysts to comment upon microeconomic foundations, slightlytimes these models are found inappropriate for analyzing such consequences. This is because their parameters are generally complicated functions of an economys technology, institutions and judicature constitution, and the preferences of economic agents. Subsequent changes in any of these structural characteristics would mean that those parameters, and then the relationships between key economic variables, would be expected to change. (Bank of England)yet the optimizing models enable the analysis of the deeply structural relationship which is dependent upon the individual variables in relation to the economic shocks and their identification. The optimizing models happen upon the intertemporal optimisation problems facing economic agents. They a great deal try to capture the interactions between the different types of agent in the economy (consumers, firms, government, unconnected sector), each of which is assumed to solve exonerated dynamic optimisation problems, subject to authoritative informational and technological constraints.These models can be employ to analyse how economic agents might optimally respond to conglomerate necessary and contribute shocks that sustain or might germinate the economy, or to changes in the structure of the economy. Equally, they can be used to examine likely explanations for observed patterns of demeanour in the data. (Bank of England) These models are effectual in Modeling consumer behaviour including con sumer aspiration Applications to financial markets Analysis of the crowd market Analysis of the role of bills One of such models being astray used is the CAPM which can provide useful insights into the reasons behind the financial market changes. notwithstanding in that location is a unspoilt limitation of this model is that it does not perform well in the empirical tests. 2. 2 IMPLICATION OF THE progression ON THE rest home DEBT ON THE pecuniary POLICY It is observed that the extend in the habilimentsation debt in the UK over the inhabit three decades was the head of the continued increase in the owner-occupied buildings and the number of mortgages getd as a analogy of the sum total signs. The rise in the harms till the time of the sub prime mortgage riposte was also because of this change magnitude private ownership of the offers.However it is kindle to note that the increase in the kinsfolk debt didnt choose much impact on the inspiration harvesting. This was due to the item that the firms were focused on the accumulation of financial additions during the recent past. Finally, while it is workable that high levels of debt whitethorn make mansion uptake more than(prenominal) sensitive to sideline rate changes, this may easily be low simply by moderating these same(p) changes. (Stephen Nickell) While in that location was some abridgment in the economies of US and Germany, the UK economy inhabited healthy during the year 2001.There was a substantive relief in the monetary policies of the country during this fulfilment and hence the UK economy witnessed an increase in the domestic demand though the situation was different with the world economy which was sapless(prenominal) and was suffering a fall in investments. The increase in the domestic demand made the overall harvesting rate of the economy positive. However some of the economists were of the go steady that such a growth in the UK GDP as against the wide spread fadeout in other developed countries was possible only at certain implied costs.For physical exercise in an article in The observer dated 27th March 2005 Fred Harrison famed that Encouraged by low raise rates, deal went on a spending spree. They stiffend savings and extracted equity from their homes to displace a consumption manna A similar medical prognosis was expressed by Hamish McRae in his article in the The self-reliant stated What is, however, clear is that the identification-fuelled spending go is, one way or another, overture to an end. (The Independent dated sixteenth March 2005). Hence it was observed that booming consumption endpointed in a rapid expansion of debt.Thus there has been a prodigious increase in the debt to income ratio which was a matter of serious concern to the analysts and the financial economists. In this context Philip Thornton made the followers remark in the The Independent issue dated 30th July 2003 Britons piled on an all- time record amount of debt ultimately month, triggering attentions that consumers have embarked on an unsustainable get binge that will end in a clangor reminiscent of the early 1990s 2. 2. 1 RELATIONSHIP BETWEEN INCOME, CONSUMPTION AND HOUSEHOLD DEBTSGenerally it is assumed that the macroeconomic policies of the UK government had resulted in a house price bubble coupled with a boom of the consumer spending. Thus the economy got missed out from the impact of the global recessionary trends. However Stephen Nickell argues that over the item 2000 to 2003 which was supposed to be the consumption boom the mean(a) quarterly consumption growth was only 0. 77 share very similar to the intermediate consumption rate of 0. 72 per centum that was existed over the last twenty five years.The consumption rate was also below the average consumption rate in the previous period 0f 1996 to 1999. From 1998 to the end of 2003, the affinity of post-tax income that was consumed was relativel y flat, hardly evidence of a debt fuelled consumption boom. Nevertheless, mortgage equity disengagement (MEW) plus unbarred quote growth rose from near 2% of post-tax household income in 1998 to over 10% in 2003. So there was indeed a significant rise in the rate of household debt accumulation from 1998 to 2003 despite the accompaniment that the ratio of consumption to post-tax income re master(prenominal)ed stable throughout. (Stephen Nickell) With this dividing line the author proceeds to state the majority of mortgage equity withdrawal leads to increase financial assets accumulation and not to change magnitude consumption. Further it is also argued that there is a good relationship between the congeries secured debt accumulation and aggregate financial asset accumulation especially in a period of rapidly spiraling house prices. Similarly there is no strong relationship between the computes of aggregate consumption growth and debt accumulation. In that case the adjacen t will be the effect of the household debt on the monetary policy.2. 2. 2 high(prenominal) LEVELS OF DEBT AND MONETARY POLICY May et al (2004) observed In 1975, household debt was around 38% of household post-tax income. By 2004, this had lift to around 125%. Currently, over four-fifths of household debt is secured on property, ie. consists of mortgages, and around 95% of all household debt is held by mortgagors. As already stated the important factor causing the rise in the household debt was the increase in the number of owner-occupied buildings and the residuum of the houses carrying a mortgage.Another factor that contributed the increase in secured debts is the change in the mode of financing by leaving the front end loading of the repayment of mortgages. Such a method of financing has lead to high loan to income ratios. It also resulted in higher mortgages relative to income. Based on these staple fiber premise there are three arguments that can be support the view that t he household debt is a predominant factor in the determination of the monetary policies. 1. The graduation exercise argument is based on the concept that the there will be significant impact on the bahaviour of the economy due to shocks if there is a high level of household debts.As observed by Griffiths equip Debt is a time-bomb which could be triggered by any number of shocks to the economy at any time (The Griffiths Commission, 2005, Exe attenuatedive Summary). Though any adverse economic shock will have the impact on the conflict and the consumption levels, higher levels of debts will make the conditions worse. The excessive debt may still hit greater precautionary saving and a outsizer drop in consumption. Overall, it is hard to tell whether higher debt levels will buzz off a significant additional veer back in consumption which cannot be modified by easier monetary policy2. The second argument is based on the possibility that the there may be a cut in the consumption d ue to the sudden realization of the debtors about the real interest on the debts and their extent of exposure to the debts in spite of their efforts to get over the level of debts. This will occasion fearsome macro economic problems leading to large scale adjustments in the monetary policies. However this argument is countered by indicating that the inexperience of the secured debt holders being young and there may be occasions that these tribe may have in an irrational way to reduce the consumption.But such phenomenon can not be identified with a majority of debts. 3. The 3rd argument was based on the fear that with more number of the great unwashed the more will be the trouble when there is a collapse in the caparison market. This fear has become true without delay with caparison boom bubble exploding. If house prices fall by 30 or 40 per cent, more mountain with mortgages fashion more people in nix equity. Of course, the consequences of this depend to some extent on the behaviour of lenders.If the mortgage debt continues to be hardened as secured, even though some is not, then debt assistance costs re main unchanged. So a lot will then depend on the confirmatory damage associated with the collapse in the housing market and what caused it in the first place. The issue is, if some disaster happens in the housing market, does the fact that more people have mortgages make the consequences very much worse? So much worse, indeed, that monetary policy should be used to discourage individuals from taking out mortgages. 2. 3 DIFFICULTIES OF CONSUMERS BECAUSE OF DEBT CREATION AN OVERVIEWAccording to a research conducted by R3 the Association of Business Recovery Professionals one out of six consumers find it difficult to manage the repayment of their secured loans and credit card payments. Of those struggling the most with their day-to-day finances, 21 per cent of respondents were account to have encountered debt problems as a result of becoming i ll, with a third (33 per cent) spotlight redundancy as the source of their monetary difficulties. (Secured Loan News) Educational loans taken for higher studies form a major proportion of debts to be re pay by the 50 share people in the age assort of 18 24 years.The same is the case with one third of the people in the age group of 25 34 years still struggling to peg the loans taken for their educational purposes. A study carried out by Abbey in early 2007 showed that the British consumers had to pay ? 48. 7 cardinal by way of unheralded bills and charges over the previous year. On an average 79 percent of the British people have spent cash on unbudgeted things and the average cost of such spending is estimated at ? 1375. Some of the issues identified with the debt creation in the UK are? The individualised add figures stood at ? 1,318 billion as of July 2007 signifying that the British consumers are indebted on an average in dickens ways as the citizens of other Europe an Countries. The people with serious debt attention problem are estimated at 7 to 9 zillion Britons. ? A majority of the people have no savings or explicit plans for savings to meet any unexpected future expenditure. A proportion of less than 50 percent of the people only have made adequate eatable for meeting the exigencies of a drop in their income level or other serious financial difficulties.? Some important statistics exhibit that a substantial proportion of the nation suffer from serious financial worries and expiry stress due to the increase of their debt burden. These statistics show that 74% of British couples find specie the most difficult subject to gurgle about 32% lie to their partners about how much they spend on credit cards 35% are kept awake at night bedevilment about their finances. ? According to the estimate from Bank of England around 50 percent of the people who have identified their debts as a serious burden on them belong to the lower income groups .It is the case with those people who live in the housing provided by the loca authorities are likely to live in debt burden at two times the average person has. ? Debts being burdensome on their own are also responsible for several other social problems and debt and these problems are interdependent on each other in foothold of their cause and effect. Groups of people like those out of work, school dropouts, people from single conjure up families or unemployed parents are more likely to have serious debt management problems. 2. 4 REASONS FOR DEBT CREATION Consumers obtain loans for different purposes.Similarly people in different income groups and different strata of life opt for secured and unsecured loans for various(a) purposes depending on their life styles and needs for different purposes. The main reasons cited for increase in the debts of the consumers is the change magnitude availability of the loans, overspending and the desire to buy right away doing major acquires like purchase of cars or spending on a contradictory vacation. The debt management problems of majority of the British consumers have arisen due to these and other reasons most of which are emotional spending.However why people get into serious debt problem is a very complicated question to find the answers there for. Though there are several factors responsible for leading the consumers to severe debt problems the following are some of the major causes that create a debt trap for the British consumers 2. 4. 1EASY handiness OF DEBT In recent years the economy of the country was doing extremely well resulting in lower rates of inflation, low interest rates and low levels of unemployment.This economic delicacy there had been an increased demand for the credit and the cost of such credit was low. The super competitive financial services fabrication had been innovative to find many a number of products to suit the needs of various strata of people. Today over 400 mainstream financi al institutions compete fiercely to satisfy consumer demand. (Lord Griffiths of Fforestfach) In this background it can be said that the easy availability of credit was the main reason for the creation of more debts by the average consumer.2. 4. 2 DIFFERENT tactic OF THE LENDERS TO ATTRACT THE PEOPLE Although the banks do not explicitly solicit or lure the vulnerable people to sell their financial services products, the products themselves have been so knowing in addition to the lending practices of the banks to fall guy the vulnerable people. Such practices include hostile marketing a pretermit of hydrofoil in calculating the cost of get undue care in lending and a lack of data-sharing. (Lord Griffiths of Fforestfach)Though it cannot be said that the banks and other lending institutions purposely target the vulnerable people customers are often enticed into over-borrowing with disastrous consequences research evidence suggests there is a strong correlation between serious i ndebtedness, drug and alcohol addictions and family breakdown. (Lord Griffiths of Fforestfach) This often leads to a situation where the vulnerable people stand the chances of more likely to get into serious debt problems. 2. 2. 3 LOW financial CAPABILITIESIt is observed out of a analyze conducted in the year 2004 that 33 percent of the people in the UK are not confident enough to regale money issues and only 30 percent of them even knew the basic interest calculations which forms the basis financial intelligence. If this is kind of financial knowledge that an average British consumer has then there is no doubt that such people may not be in a position to make sound financial decisions concerning their ain finances including availing of secured and unsecured loans.Such lack of financial knowledge will make them drown in serious financial struggle as a result of unmanageable debts they have contracted. 2. 4. 4 overleap OF SAVING CULTURE The trend of nowadayss Britain is buy no w and pay later as against the traditional way of living of saving money to buy assets. This has seriously disturbed the saving habit of the people over the period of time. In the current scenario more than 50 percent of the British pensioners make a cut on their other needs to appease their annual fuel bills.The decline in the habit of saving is one of the main reasons for the increased debt problems. Unless the saving habit of the people change drastically the situation of debt problems is likely to grow into greater magnitude. 2. 4. 5 materialistic ATTITUDE OF THE MODERN SOCIETY The attitude of the society towards borrowing and its effects on life has considerably changed over the last few decades. assign is no more considered as dangerous as it was comprehend once upon a time. Now it is considered as more neutral and beneficial to the society.With this change in the attitude people have become more materialistic to obtain loans to buy the things irrespective of the need for such things in their lives. This is evident from the buying habits of British consumers exhibited in the following section. In one of the surveys conducted by Abbey, the financial service provider, it is learnt that Britons have spent more than ? 169 billion on items that they rarely, if at all, use. Overall the average consumer has paid out some ? 3,685 through unneeded objects, which could consequently impact upon their ability to handle their day-to-day finances. (Secured Loan News) The survey also revealed that half of all consumers own an high-priced clothing item which they wear only occasionally and over 35 percent of them have unworn shoes. However, women were reported to be ride pointless fashion spending. Some 58 per cent of females were said to have jobless garments, with this figure falling to 45 per cent for footwear. Meanwhile, spending on such products accounted for 45 and 23 per cent respectively among men. (Secured Loan News)Electronic items, computer game conso le or video cameras and cooking equipments, repeated purchase of fine china items, exercise equipments, stunner gadgets that are not frequently used are some of the other items on which the British consumers spend their money and create debts for themselves. However, financial problems could be particularly increased for those 288,000 people who have bought a second home in Britain which they claim to make little use of, which as a result may see them to struggle to make secured loan repayments. (Secured Loan News) 2. 5 LEVEL OF CONSUMER CREDITThere has been a steady growth in the consumer lending in the period during the 1990s to early 2000s. But the growth has been sluggish after the climb in the last decade. According to the statistics released by Datamonitor unsecured Loans and borrowing via other forms of consumer credit push down by 4. 5 per cent over the course of last year (2006) to ? 207. 8 billion. (Secured Loan News) Maya Imberg the financial service analyst from Datam onitor says A weaker labour market, feature with high consumer debts and weakened consumer confidence, meant that consumers cut down considerably on spending and aimed to repay more of their debts over 2006. The study also indicated that the debt outstanding for an average customer stood at ? 4,522 in Consumer credit debt for the year 2006, which is against the ? 4,510 enter for the year 2005. This outstanding debt figure was corroborated by the statistics released by the financial charity Credit Action which estimated the debt due by an average Briton at ? 4,550 by way of debts obtained on unsecured personal loans, credit cards, overdrafts and other forms of borrowing. This amount was estimated as at the end of March 2007.Credit Action has compiled the following statistics on the UK personal debt as on 1st of September 2007 which is alarming ? nub UK personal debt at the end of July 2007 stood at ? 1,355bn. The growth rate increased to 10. 1% for the previous 12 months which equ ates to an increase of ? 117bn. ? make out secured lending on homes at the end of July 2007 stood at ? 1,140bn. This has increased 11. 0% in the last 12 months. ? sum up consumer credit lending to individuals in July 2007 was ? 214bn. This has increased 5. 3% in the last 12 months.? Total lending in July 2007 grew by ? 10. 3bn. Secured lending grew by ? 9. 2bn in the month. Consumer credit lending grew by ? 1. 1bn. ? fair household debt in the UK is ? 8,856 (excluding mortgages). This figure increases to ? 20,600 if the average is based on the number of households who actually have some form of unsecured loan. ? Average household debt in the UK is ? 56,000 (including mortgages). ? Average owed by either UK adult is ? 28,550 (including mortgages). This grew by ? 210 last month. ? Average outstanding mortgage for the 11.8m households who currently have mortgages is ? 96,560 ? Average interest paid by each household on their total debt is approximately ? 3,700 each year (this equat es to 9% of take home pay). ? Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to ? 4,515 per average UK adult at the end of July 2007. ? Britains personal debt is increasing by ? 1 one thousand million every 4 minutes. (Credit Action) A intense representation of the growth in the UK personal debt is depicted below