Debt anD the Family SerieS: rePOrt 2: Debt anD the GeneratiOnS · 2012. 2. 10. · REPORT 2: DEBT AND THE GENERATIONS 1 INTRODUCTION • This is the second in the Debt and the Family

Debt anD the Family SerieS:rePOrt 2: Debt anD the GeneratiOnS

REPORT 2: DEBT AND THE GENERATIONS

CONTENTS

SUMMARY P1

1. INTRODUCTION AND BACKGROUND P3

2. DEBT, WEALTH AND THE GENERATIONS P5

3. STATE OF THE NATION: THE GENERATIONS, SECURED AND UNSECURED DEBT P9

4. FINANCIAL VULNERABILITY AND BEHAVIOURS P15

5. HARD TIMES AND POLICY IMPLICATIONS P19

ANNEX 1: ADDITIONAL CHARTS AND TABLES P25



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INTRODUCTION• This is the second in the Debt and the Family

series of reports commissioned by ConsumerCredit Counselling Service (CCCS), the UK’sleadingdebtadvicecharity.Thisreport looksatthe impact of debt ondifferent generations ofhouseholds using published research and newanalysisofCCCS’sunrivalledclientdatabase1.AstheUKeconomyentersadifficultperiod,manyhouseholds face hard times and uncertainty.Going forward personal debt will increasinglyaffectthequalityoffamilylifeintheUKandthecapabilityoftheUKfinancialservicesindustrytoemergefromtheeconomicdownturn.Therefore,itisimportantweunderstandasmuchaspossiblehowdifferentgenerationsareaffected.

KEY FINDINGS• Plottingthelevelofdebtagainstageshowsthat

levelsofdebtrisetoapeakaspeoplereachtheirmid30s-mid40s.Whilenearlytwo-thirds(65%)of all debt is held by households aged 35-54,the35-44agegroupaloneholds37%.Thishascontributedtohighlevelsoffinancialvulnerability,withthe40-44agegroup–whereweestimatethereare900,000financiallyvulnerablepeople–mostindanger(seepage5&16).

• However, our research suggests that this

situation may be changing, with consumersnow acquiring large levels of debt, especiallyunsecured debt,much younger. Almost three-quartersofpeopleinthe18-24and25-39agegroupsnowhaveunsecureddebts,comparedtoaround60%ofthe40-54agegroup.Thismaybebecauseyoungerconsumerstendtobelessfinancially aware andmore inclined to relyoncredit tomakeendsmeet–19%of the18-24

agegroup say they are veryor fairly likely toneedtoborrowinthenext3months(page11&16).

• Duetorisinghousepricesandreducingincomesit seemsunlikely that youngerhouseholdswillbeabletoacquireassetsinthesamewaytheirparentsandgrandparentsdid. Between1997and2007thepriceoftheaveragehousegrewfromaround2.3timestonearly5.5timesgrossearnings,meaningincreasinglyfirsttimebuyers(FTBs)canonlygetontothehousingladderwithhelp from the ‘bankofmumanddad’ – 45%ofallFTBsin2010receivedfinancialassistance,comparedto20%in2005.ForFTBsunder30,84% require financial assistance in order tobuy. This is leading to the exclusionofpooreryoung households from the housing marketandperpetuatingexistingdisparities inwealthwithingenerations(page7&22).

• Studentloanswillalsoimpactontheabilityofyounger households to acquire wealth. Therearenearly3.2millionstudentloansinplacewithtotaldebtoutstandingamountingto£35billion,an increaseof£13.25billionoverthepreviousthree years. Total student debt outstanding isexpectedtogrowto£153billion inreal termsby 2031, with loan repayments amountingto nearly £7 billion a year.With student loanrepayments reducing available income, futuregenerationswillfinditdifficulttosaveorinvestin pensions until they are older, which willimpactconsiderablyontheirqualityoflifewhentheyreachretirementage(page13).

• Olderhouseholds (55+) tend tobe inamuchstronger position, with many having acquiredsignificant assets (including property) as they

SUMMARY

1 CCCShas1.3millionclientsondatabaseandcounselsc190,000eachyear.


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approachretirement.Thedecadeintherunuptothefinancialcrisissawahugetransferofwealthfromyoungerhomebuyerstooldergenerationsthroughthemechanismofrisingpropertyprices,andtakentogethertheover60snowownnearlyhalfofallnetassets in theUK. In contrast theunder30sownjust5%(page6).

• However, oneworrying issue uncovered by thereport is that there is a previously overlookedminority of older peoplewith extreme debts –forexample,researchsuggeststhat7%ofthoseagedover55stillholdsecureddebtsgreaterthan£150,000–whoarestrugglingtorepaythem.Ouranalysisshowsthattherearesignificantnumbersofolderhouseholdswith veryhigh repayment-to-income (RTI) ratios. Around 12% of thoseaged55andoverhaveanRTIgreaterthan30%,compared toonly9%of the18-24agegroup.This indicates that some older households onlowerincomeshavebeencaughtwithexpensivecreditthatishardtoescape(page9&11).

• Finally, although our overall findings point toa worsening situation for younger people, itmustberememberedthatthecurrenteconomicdownturn is affecting all households. Ourpreviousreport,DebtandHouseholdIncomes,found that 6.2 million people are financiallyvulnerable, and analysis of CCCS clients forDebtandtheGenerationshasshownthata£50reductionindisposableincomewouldincreasethisnumbersignificantly,byasmuchas50%forsomeagegroups(page15).

KEY RECOMMENDATIONS• Theprioritymustbetoprotectconsumersfrom

the aggressive practices of some sub-primelendersandthecommercialdebtmanagementcompanies who exacerbate, rather thanalleviate, financial problems. This should be

donethroughacombinationoftough,properlyenforced consumer protection laws andensuringfinanciallyvulnerablehouseholdshaveaccess to independent, objective debt advice.Making sure that households get this adviceat the earliest stage must be a priority. Earlyinterventionandpreventioniscritical.

• We have a specific concern about the newnational pension scheme NEST that is beingintroduced from2012. The very high debt-to-incomeratiosevidentintheNESTtargetgroup(low-medium incomes) means they will needgood advice or guidance before deciding onwhethertopaydowndebtsorauto-enrol intoNEST.We urge the free advice sector toworkwithNESTandotherstakeholderstoensurethatthe potential target group has the necessaryadviceandguidanceneeded.

• In the long term, theneed to repaydebts forlonger,andtheinabilitytobuildupassetsandincomes will surely impact on the retirementplansofmanyhouseholds.Wemayalsoseeanincrease in problem mortgage debt amongstolder retired households as thewave of over-indebted ‘baby boomers’ moves towardsretirement. This surely points to the need torevisittheroleofequityreleaseinhelpingolder,incomepoorhouseholds.

• Theabsenceofsufficientlygranulardatalimitsdetailed investigation into household financesand their potential vulnerability to changingeconomic circumstances. Therefore, as withthe previous report, we continue to stronglyrecommend that policymakers, regulators,lendersanddata-richthirdsectororganisationswork together to establish comprehensivedatabasestoallowtimeseriesmonitoringandanalysisofhouseholddebt.


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Thereportlooksatdebt:

i) within current generations analysing theexperiencesofyounger,‘middle-age’,andolderhouseholds;and

ii) between generations over time given thelifecycle model of debt repayment2 and assetaccumulation, and the transfer of wealthbetweenyoungerandoldergenerationsthoughthe mechanism of house prices - at its mostbasiclevel,oneperson’sdebtisanotherperson’sassetsandwealth.

Thereportisabletopresentamorecomprehensivepictureoftheexperiencesofdifferentgenerationsanddebtduetotherealadvantagegainedthroughthe access provided to the CCCS database. Thiscomplements the existing published data andallowsforamoregranularanalysisofdebtamongstspecificagegroups.Thisreportisimportantasthelevel of exposure to debt, and attitudes towardsdebt,differconsiderablybetweenthegenerations.Moreover, there appear to be major culturalchanges underway in terms of attitudes to debt,whiledevelopmentssuchasstudentloanswillalterthedebtlandscape.Takingonhighlevelsofdebtisbecomingnormalisedatanearlierage.

Themajor public policy issue that emerges fromthis report is that debt continues to determinethe financial circumstances of many householdsthroughout their lifetimes and that varioussocio-economic trends have seriously impairedconsumers’abilitytomeetcreditcommitmentsandaccumulateassets.Currentandfuturegenerationsof youngerpeoplemaywell experiencedebt inaverydifferentwaytooldergenerations.

Thereportisstructuredin5sections.Followingthisintroduction,Section2providesahigh levelviewofdebtandthegenerationslookingataggregatelevelsofdebtheldbydifferentagegroupsusingpreviouslypublished research. Italso looksat theassets side of the household balance sheet andtheveryparticularroleintheUKthatpropertyhasplayed in transmitting debt and assets betweenthevariousgenerations.Section3thenusesCCCSdata togo intomoredetailon secureddebtandunsecured debt. Section 4 looks at financialvulnerabilitiescausedbydebt for thegenerationsand different attitudes and behaviours towardsdebt evident in different age groups. Section 5looks forward to consider the impact of debt onthe financial futures of the different generationsanddiscussestheimplicationsforpolicymakers.

Readers should note that most of the policyinterventions included in the first report in theseries–DebtandHouseholdIncomes–applytothisreport.However,whererelevantwehaveincludedsomenewpolicyproposals.

The report was researched and written by MickMcAteer,GarethEvans, andAnnaGavurinof TheFinancialInclusionCentrewithadditionalresearchand analysis provided by Joe Surtees and MarkHaslam from CCCS. As with the first report, wewelcomeanycommentsorqueries.PleasecontactMick.mcateer@inclusioncentre.org.uk.

2 ‘Lifecyclemodel’:incomeincreasingwithageallowinglargesecuredandunsecureddebtstobepaiddownandnetassetsaccumulatedasretirementapproaches.

1 INTRODUCTION AND BACKGROUND


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DEBTMiddle age households are more exposed torelativelyhighlevelsofdebtthanolderhouseholdswithin the general population, therefore there isa higher concentration of over-indebtedness andfinancialdifficultieswithinthesegroups.

Chart 1: Proportion of debt held by different agegroups

Source: British Household Panel Study, Institute of Social and Economic Research/Future Foundation, 2003

Nearly two-thirds (65%) of all debt is held byhouseholdsaged35-54.The35-44agegroupaloneholds 37%of all consumerdebt. In contrast, theover65sholdabout3.5%oftotalconsumerdebt.Ifweplotachartofdebtagainstagewecanseethis‘bulge’,withlevelsofdebtrisingwithageand

peakingforhouseholdsastheyreachtheirmid30s,thiscontinuestotheirmid40s.Debtlevelsthenfalloffasdebtisrepaidandretirementapproaches.

However, it is likely in the future that variousfinancial and socio-economic trends will changetheshapeofthiscurve.Thebulgewillshifttotherightasawaveofyounger-middleagehouseholdstakelongertorepaydebts(includingstudentloans)acquiredwhenyoung.

Increasingly younger households are relying oncredit, with three-quarters of 18-24 year oldshaving some form of credit compared to halfof households aged 55. This ismainly unsecuredcredit,two-thirdsofhouseholdsbetweentheagesof18and24haveonlyunsecuredcreditcomparedto27%ofhouseholdsaged55andover.

The number of younger households with secureddebt iscurrently relativelysmallbut this risesuntillatemiddleage.Governmentresearchpresentedinthetablebelowshowsthat9%of18-24householdshave secured debt compared to 56% of 40-54group.Thisisnotsurprisingasitreflectstheuseofmortgage debt by people getting on the housingladderandthenrepayingmortgagesovertime(wedevoteaseparatesectiontomortgagedebtbelow).

2. DEBT, WEALTH AND THE GENERATIONS

Table 1: Use of secured and unsecured credit by age, %

All secured Secured only Secured and unsecured Unsecured only Any credit

18to24 9 2 7 66 75

25to39 48 14 35 38 86

40to54 56 20 36 24 80

55orover 23 9 15 27 50

Allhouseholds 37 12 25 34 70

Source: Table A18: Credit, Debt, and Financial Difficulty in Britain, BIS, 2009/10


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Table 2 illustrates how younger people are nowtakingonmuchgreaterdebtthanoldergenerations–especiallyinthe5yearsbetween2000and2005.By2005,theaveragedebtofthe20-29agegroup(£56,000)surpassedthatofthe40-49agegroupforthefirsttime.The30-39agegroupsawthebiggestincreaseindebt,by£42,000inthe10yearstoend2005, with almost three-quarters of this increasecominginthefiveyearsfrom2000-2005.

Thereare,ofcourse,veryimportantcaveatstoallthis.Thereisawidevariationofexperienceswithinage bands – driven by household incomes andother characteristics such as single parent familystatus.Furthermore,theexperiencesofhouseholdswhoowntheirownhomesandthosewhorentcanbeverydifferent3.Inaddition,thereisasignificantminorityofolderhouseholdswhoare infinancialdifficulty. Nevertheless, notwithstanding thiscaveat,thereisanobviouslinkbetweendebtandage,andageandlikelihoodofgettingintofinancialdifficulty.

WEALTH Whenanalysingtheimpactofdebtacrossdifferentagegroups,itisnecessarytoanalysetheassetsheldbydifferentgenerations,asthisimpactsdirectlyon

abilitytoservicecredit–especiallywhenpropertyassetsaresuchahugepartofUKhouseholdwealth.

We have combined data for debt and net assetsbelow to show the lifecycle of debt and assetaccumulation that many households have beenaccustomedtoover thepreviousseveraldecades.Although it is important to recognise that manyvulnerable older households have not benefited,income mobility and the lifecycle model of debthad allowed the current generation of olderhomeownersasagrouptopayoffmortgagedebtduringtheirpeakearningyearsinlate-middleage/pre-retirement phase. As retirement approachedtheyhadlowerlevelsofoutstandingdebt,allowingmanyolderhouseholdstobuildupsignificantnetpersonalwealth.

Theunder30sown5%ofthenetassetsintheUK;30-40 year olds just under 9%; 40-50 age groupjustunder17%;50-60agegroupnearly22%;60-70agegroup21%;andtheover70s27%.Takentogether the over 60s own nearly half of all netassets in theUK.Thisdisparitymayhavebecomeeven more pronounced due to the increases inpropertypricesintherunuptothefinancialcrashin2007/08.

3 SeethefirstreportintheDebtandFamilySeriescalledDebtandHouseholdIncomesformoreinformationonthefinancialcircumstancesofdifferenthouseholds.

Table 2: Average total debt by age, £

Age group 1995 2000 2005 Growth Growth 1995/2005 2000/2005

<20 2,000 2,000 - -

20-29 24,000 32,000 56,000 32,000 24,000

30-39 33,000 45,000 75,000 42,000 30,000

40-49 26,000 33,000 54,000 28,000 21,000

50-59 14,000 17,500 29,500 15,500 12,000

60-69 4,000 5,000 8,000 4,000 3,000

70-79 2,500 2,000 3,500 1,000 1,500

Source: Figure A1, Drivers of Over-indebtedness, Richard Disney, Sarah Bridges, John Gathergood Centre for Policy Evaluation, University of Nottingham, report to DBERR, 2008


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Chart 2: The lifecycle of debt deleveraging and asset accumulation

Source: British Household Panel Study, Institute of Social and Economic Research/Future Foundation, 2003

However, changes in the way debt is acquiredcould have significant knock-on effects on theaccumulationofnetpersonalwealthandassets inthe future. If today’s young have to spendmoreon mortgages, they will have less opportunity toaccumulatewealth than previous generations andhencepassitontotheirchildren.Thiswillbeevenmoreofanissueifincomemobilityfalls.

THE ROLE OF PROPERTY IN ACCUMULATING DEBT AND ASSETS IN THE UKIn1997,theratioofhousepricetoearnings(HPER)was around 2.3 times gross earnings. By the eveofthefinancialcrisisin2007,thatHPERhadmorethan doubled to nearly 5.5 times gross earnings.We estimate that in thedecade in the runup tothe crash, FTBs and youngermoverswould havepaidonaveragearound£30,000moretogeton,ormoveup, theproperty ladder than ifpropertypriceshadrisenwithlongtermtrends.

Thishasmadeitmuchharderforyoungerpeopletogetonthepropertyladderwithoutextrasupport,which has traditionally come from inheritancesorthe‘bankofMumandDad’.AccordingtotheNationwidehousepriceindex,whileUKproperty

Chart 3: Property prices transfer wealth across generations

Source: Nationwide House Price Earnings Ratio (HPER)

priceshavegrownby3.8%perannuminrealtermssince1975,inthedecadeleadinguptothefinancialcrashin2007theyroseby8.8%perannuminrealterms.Thisabovetrendgrowthwasdrivenbyanoversupplyofmortgagecreditfacilitatedbyliberallendingandregulatorypolicies.

Chart 4: Riding the property wave

Source: Nationwide House Price Earnings Ratio (HPER)

Asaresultyoungergenerationsareleftwith‘extra’debtwhichrepresentsahugetransferofwealthtothosegenerations furtherup theproperty ladder.Theeffects canbe seen in thedistributionofnetproperty wealth by age. The median property


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wealthof the25-34agegroup is£60,000,whilefor groups aged over 45 it is between £165,000and£200,000.

However,while age is a keydetermining factor –with older generations having fewer and lowerdebtsandgreaternetassets–thereisalsoawidevariation in the experiencesof householdswithingenerations.

Manyolderpeoplehavevery fewassets to speakof.Forexample,thelargenumbersofhouseholdswhohaveneverbeenabletogetonthepropertyladderhavenotbeenabletoacquireassetsthroughthistransferofwealth.Similarly,theexperiencesof

womenhavebeenverydifferenttomen–especiallyiftheyaresingleparents.

It should also be recognised that property cancreateanillusionofwealth.Theseassetshavetoberealisableinsomewaytoprovideagenuinebenefitforhouseholds–thismaynotalwaysbethecasewith many older households who are asset rich,butincomepoor.Asthisreportgoesontoshow,even though older households as a group havesignificantnetassets,thereareasurprisinglylargenumberofolderandretiredhouseholdswhohaveproblemswithunsecureddebts, yetwhomaybesittingonunrealisedpropertywealthwhichcouldbeusedtoeasethefinancialstrain.


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In the previous section,we took a high-level lookat how total debt and assets varied between thegenerations.Inthissection,welookinmoredetailattheprofilesofsecuredandunsecureddebt.

SECURED DEBT AND MORTGAGESNot surprisingly, the level of mortgage debtoutstanding reduces considerably with age. Datafrom the British Household Panel Survey (BHPS)shows that themedian secured debt for the 25-39agegroupsisjustunder£80,000,comparedto£40,000forthe50-54group,andaround£30,000forthe55-64agegroups.

Chart 5: Level of mortgage debt falls with age

Source: BHPS 2005/ Debt and Older People, Age UK, PFRC

Thisgeneralrelationshipbetweenageandsecureddebt is reinforcedbyCCCSowndata,withCCCSclientsinthe35-49agegroupshavingthehighestsecureddebts.

It is interesting to note here the differencebetweenthemedianandmeanlevelofmortgageoutstandinginvariousagegroupsinbothgeneralpopulation data and CCCS’ own data. Themeanvaluesaremuchhigherthanthemedianvaluesin

certainagebandssuggestingthatsomehouseholdshavetakenonextremelyhighmortgages.

Chart 6: Profile of CCCS clients and secured debt

Source: FIC analysis of CCCS database

Asageneralrule,veryhighlevelsofsecureddebtare evident amongst people in their thirties andearly forties. Government research suggests that26%ofthoseinthe25-39agegrouphavesecureddebts greater than £150,000, while 13% havesecureddebtsgreaterthan£200,000.Incontrast,7%of those aged 55 or over have debts greaterthan£150,000,with4%havingdebtsgreaterthan£200,000.

Table 3: Proportions with high levels of secured debt

>£150,000 >£200,000

18-24 3 1

25-39 26 13

40-54 19 10

55andover 7 4

Allwithsecureddebt 19 10


3. STATE OF THE NATION: THE GENERATIONS, SECURED AND UNSECURED DEBT


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However, it is worth noting that while youngerhouseholds tend to have larger mortgages, thedatasuggeststhattherearesomeolderhouseholdswho are about to enter retirement (or alreadyhave)withhighmortgagedebt.ThedatainChart5 shows that although themedianmortgage forthegeneralpopulation in the60-64agegroup isaround £30,000, the mean mortgage is around£65,000 implying that some people within thisgroup continue to owe considerable amounts.Similarly,while themedianmortgage in the70+agegroupwasjustunder£20,000,themeanwasaround£46,000.

Moreover,theamountofmortgagedebtowedbyolder households in the general population rosedramatically in the decade to 2005 – see chartbelow.Themedianmortgageowedby the60-69agegroupdoubledinjustfiveyearsfrom£15,000to£30,000.

Chart 7: Older households owing larger mortgages

Source: Figure 6.4, Debt and Older People, Age UK/ PFRC

CCCSdataprovidesanevenmorestrikingandup-to-datepictureofhowsecureddebthasincreasedacrosstheagespectrumoverthelast5years.Forexample,in2005themediansecureddebtamongst30-34agegroupwasaround£40,000.By2010,it

wasnearly£120,000.Forthe40-44agegroup,therespective debtwas £48,000 and £119,000 – anincreaseof150%.

Chart 8: Secured debt amongst younger households has risen dramatically

Source: FIC analysis of CCCS data

CCCS data allows us to compare debt-to-income(DTI) ratios. These suggest a lot of very youngerhouseholds are currently finding it moredifficulttorepaysecureddebtthanmiddle-agedhouseholds. WhereasCCCS clients in 20-24 agegrouphaveamediansecuredDTIofover11,abovetheageof35nogrouphasanaverageDTIofhigherthan7.7andmanyhaveratiosbelow7.

Chart 9: Older clients have lower secured debt leverage



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However,againtheanalysisrevealsworryingsignsofover-indebtednessamongstasignificantminorityofolderpeople as evidencedbypersistentlyhighDTIs.Bydefinition,consumerswhoarehelpedbyCCCSareover-indebtedbutthefactthatthemeanDTIofhouseholdsinthe70-74agegroupis8timestheirincomeisworrying.

UNSECURED DEBTWithunsecureddebt, for thegeneralpopulation,thesamebasicrelationshipholdsaswithsecureddebtandmortgages–i.e.youngerandmiddle-agehouseholds aremore exposed to unsecured debtthanolderhouseholds.However,thepatternisnotexactlythesame.

DepartmentofBusiness,InnovationandSkills(BIS)researchhasshownthat72%ofhouseholdsinthe18-39agegrouphaveunsecureddebt;60%ofthe40-54agegroupand41%ofthe55+agegroup.Youngeragegroupshavemoredifferent typesofcredit.13%ofthe25-39agegrouphave4ormorecreditcommitmentscomparedto9%ofthe40-54agegroupandjust3%ofthe55+agegroup.

Younger households now owe significantly morethan older households in unsecured debt. The20-29 age group owes on average £5,000. Thiscompares to£1,700and£400 for the60-64and65-69agegroupsrespectively.

Chart 10: Levels of unsecured debt falls with age

Source: BHPS 2005/ / Debt and Older People, Age UK, PFRC

Inthegeneralpopulation,theproportionofyoungeragegroupswithveryhighunsecureddebtsismuchgreaterthanoldergroups.Forexample,54%ofthe18-24agegroupwithunsecureddebthavedebtsgreaterthan£10,000comparedtoonly20%ofthe55andovergroup.

Younger age groups also have higher unsecuredDTIs. 38% of the 18-24 age group have a DTI ofmorethan60%comparedto17%ofthe55+group.

However, the older age groups have a higherproportion of debtors with high repayment-to-income (RTI) ratios. Of the 18-24 age group, 9%haveanRTIgreaterthan30%comparedto12%ofthoseaged55andover.Thismaybeareflectionofaproportionofolderhouseholdsonlowerincomes

Table 4: Proportions of households with high levels of unsecured debt, %

>£10,000 >£20,000 DTI>60% RTI>30%

18to24 54 18 38 9

25to39 41 16 20 10

40to54 29 13 16 1 1

55orover 20 8 17 1 2

Allwithunsecuredcredit 35 13 20 1 1



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whohavebeencaughtwithexpensivecreditthatishardtoescape.

Worryingly,CCCSdatashowssomestrikinglylargelevelsofunsecureddebtevidentamongstolderagegroupscompared toyoungergroups– indicatingthatasignificantminority(thegroupaccountsforsome10%ofCCCSclients)havereachedretirementwithoutpayingoffunsecureddebt.The60-64agegrouphave the highest unsecureddebt amongstCCCSclients.

Chart 11: Profile of CCCS clients’ unsecured debts


Notonlydothe60-64agegrouphavethehighestmedianandaverageunsecureddebtlevelsamongstCCCS clients, they also have the highest medianandmeanDTIs.ItisworthnotingthatthetypicalCCCS client aged between 65 and 80 has total

unsecureddebtswortharound30%morethanhis/hernetincome.

As with the analysis in the previous report, weare unable to say whether these extremely highunsecuredDTIsamongstsomeoldergroupsareasaresultofpoorlendingpractices,peoplesufferingseriousreductionsinincomesafterloanshadbeenmadeoracombinationofboth.Furtherworkonthiswouldhelpunderstandwhetherimprovementstolendingpracticesareneeded.

Chart 12: CCCS client DTIs peak at age 60


STUDENT DEBTOneofthemostcontentiousdebtrelatedissuesofrecent times is studentdebt. As the tablebelowshows, as of 2011, therewere nearly 3.2millionloansinplacewithtotalstudentdebtoutstanding

4 NB:thisdataincludesvaluesforEUstudentsstudyingintheUK,butitisasmallminorityofthetotal

Table 5: Key data on student loans4

Financial year Loans out-standing £m No of loans millions Amount lent £m Amount repaid £m

2007-08 21,944 2.34

2008-09 25,963 2.61 4,204 900

2009-10 30,489 2.9 5,049 1,010

2010-11 35,186 3.18 5,578 1,143

Source: The Students Loan Company/ BIS, SLCSFR 02/2011


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amounting to £35 billion. The value of loansoutstandinghasgrownby£13.25billionovertheprevious 3 years. Those with student loans arecurrentlyrepaying£1.1billionayear.

DatafromBISreleasedasaresultofaFreedomofInformation request, estimates that total studentdebtoutstandingwillgrowto£153billioninrealtermsby2031.Atthattime,peoplewithstudentloanswillberepayingnearly£7billionayearinrealterms.

Thegovernmentestimatesthatbytheyear2032,theaveragegraduatecanexpecttohave£31,000ofdebtattheendoftheiruniversitydegree.Thismay be an underestimate as it is based on theassumption that university fees will be just over£7,500andincreaseinlinewithinflationovertheperiod.However,theOfficeofFairAccessestimatestheaverage fee tobearound£8,400.Thiswouldobviouslyincreasethescaleofstudentdebts.

Table 6: Real terms growth in student debt, £

Financialyearend Totaloutstanding£billion Amountrepaidannually£billion

2012 35 1.7

2016 57 2.6

2021 94 3.8

2026 126 5.1

2031 153 6.9

Annualised%growth 7.7 9.4

Source: BIS response to Freedom of Information request, http://www.scribd.com/doc/63078079/LC-exclusive-Student-Debt-Forecast, Annual data can be found in Table A1 in Annex 1


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One of the advantages of the CCCS data is thatit allows us to understand just how vulnerablesome households are to changes in financialcircumstances. We have been able to analyse –by age group –what proportion of CCCS clientshavenomoneyleftattheendofthemonth.Thefindingsareshocking–foragegroupsbetween35and59morethanathirdofCCCSclients(andforsomeage rangesalmosthalf)are in thispositioneverymonth.

Moreover,since2005theproportionofCCCSclientswithnothingleftattheendofthemonthhasrisensignificantly for almost all agegroups (see chart,below).Amongthe50-54agegroup,forinstance,ithasalmostdoubled,from23%to44%.

Chart 13: Proportion of CCCS clients with nothing left at end of the month has risen


Thisisasignificantdeteriorationinthepositionofthemostfinanciallyvulnerablehouseholds.Butwefearthatthepositionwillgetworse.TheCCCSdatasuggests that a large number of clients are justaboutkeepingtheirheadsabovewater.Themostvulnerable to a downturn in household financesappear to be clients with children in their mid-

40sandclients in their50s.Aswesetout inourprevious report, a range of economic and policyreformsare likelyto impactdisproportionatelyonlowerincomehouseholds.

Totrytogetabetterunderstandingoftheimpactof reductions in income, we have modelled theeffectofa£50permonthreductionindisposableincomes.

Table 7: Impact of £50 per month income reduction on financially vulnerable, %

Age group No money left Impact of

18-19 34 70

20-24 32 60

25-29 30 53

30-34 32 52

35-39 34 53

40-44 38 55

45-49 42 59

50-54 44 60

55-59 43 61

60-64 27 45

65-69 23 39

70-74 13 30

75-79 9 23

80+ 8 22


As the results show, a £50 per month incomereductionwouldpushmanymoreCCCSclientsintoabudgetshortfall.Itisinterestingtonotethattheproportionamongsttheyoungestagegroupsandoldestagegroupswoulddouble.Theimpactisquitestrikingbutperhapsnotsurprisingasyoungerage

4. FINANCIAL VULNERABILITY AND BEHAVIOURS

£50 pm reduction- no money left


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groupsandolderagegroups tend tohave lowerdisposableincomesthanaverage.

Overrelianceoncredittocoverthecostsofeverydaylivingisgenerallyastrongindicationoffinancialvulnerability. At themoment some 7% of thoseagedover 55 rely on credit in thiswaywhile fortherestofthepopulationitrangesbetween12%and14%(seetableA2,Annex1).Althoughthesearesmallproportions,theyaccountforarelativelylargenumberofpeople.

Ofthe18-24agegroup,19%saytheyareveryorfairlylikelytoneedtoborrowinthenext3monthscomparedto15%ofthe25-39group,11%ofthe40-54group,andjust5%ofthe55andovergroup(seeTableA3,Annex1).

Households in the 25-39 age group are morethan twiceas likely tobe inarrearsor insolvencycompared to those in the 55+ group – 15%comparedto7%(seeTableA4:Annex1).

ESTIMATES OF NUMBERS OF FINANCIALLY VULNERABLE HOUSEHOLDSUsing the samemethods as the previous report,wehave tried to estimatehowmanyhouseholdsareeitherinfinancialdifficultyoratriskofgettingintofinancial difficulty.Unfortunately, due to thedifferent ways government sources categoriseagegroups,we cannotget a precisematchwiththe CCCS categories. However, we have tried tocombine government data and CCCS own datatoestimatewithasmuchprecisionas ispossiblehowmanyhouseholdsarefinanciallyvulnerableforeachagegroup.

Table 8: Number of households in each age group facing financial difficulty

Age group In difficulty At risk Either

% Number % Number % Number 000s 000s 000s

18-19 9 45 11 56 20 101

20-24 7 38 9 47 16 85

25-29 14 273 11 218 26 510

30-34 16 311 13 249 30 580

35-39 13 372 12 323 26 720(3)

40-44 17 465 15 403 32 899(1)

45-49 14 352 12 305 28 681(4)

50-54 16 387 14 335 30 748(2)

55-59 15 339 14 316 29 655(5)

60-64 8 169 10 218 17 387

65-69 11 190 14 245 25 435

70-74 3 61 4 78 8 139

75-79 5 64 6 78 10 127

80+ 3 71 4 91 8 161

Total 12 3,200 11 3,100 23 6,200

Source: FIC estimates based on government population data, CCCS database and BIS research Table A41: Credit, Debt, and Financial Difficulty in Britain, BIS, 2009/10; rankings are in brackets


17

Wecansee that theagegroupswith thegreatestnumber of financially vulnerable households (inor at riskoffinancialdifficulty) are the35-59agegroups.Indeed,these5groupsconstituteover3.7millionofthetotal6.2millionhouseholdsidentifiedasfinanciallyvulnerable(nearly60%ofthetotal)yettheyconstituteonly47%ofUKhouseholds.

It is fair to conclude that compared to olderhouseholdsthen,younger-middleagehouseholdsare more financially vulnerable on a range ofmeasures.

UNDERSTANDING FINANCIAL VULNERABILITYIt is important to try to understand why certaingroupsaremorefinanciallyvulnerablethanothers.This is a complexfieldand it is importantnot tooversimplifybut the2main reasonsaredifferentfinancial circumstances and different financialbehavioursandattitudes.

As we explain above, older households havebenefitedhugelyfromthelifecyclemodelofdebtandincomemobilitysoalargerproportionofolderhouseholdsareboundtobeinamorecomfortableposition. But as we can see from the followingresearch,olderhouseholdsarealsomore likelytoexhibitthetypesofpositivebehavioursthatreducethe risk of getting into financial difficulty andextremedebt.

Ofthe25-39agegroup,13%ofhouseholdshave4ormoretypesofunsecuredcreditcomparedtojust3%ofthe55+group.

Furthermore,14%ofthoseagedbetween25and39saytheyhaveastrongorverystrongpropensitytospend–nearly3timestheproportionofthoseaged55andover(5%).

Table 9: Use of unsecured credit by age of household, %

Has unsecured credit commitments

18to24 72 6

25to39 72 13

40to54 60 9

55orover 41 3


Table 10: Spending orientation by age, %

Strong/very strong

18to24 11 27

25to39 14 25

40to54 10 31

55orover 5 45


Olderfinancialconsumersarealsomorelikelytobefinanciallyaware.15%of thoseaged18-24,31%ofthe40-54agegroup,and43%ofthose55andover are thought to havemoderate-high level offinancialawareness,helpingthemunderstandtheconsequences and pitfalls of getting into seriousdebt.

Table 11: Levels of financial awareness vary by age, %

High/ moderately high

18to24 15 35

40to54 31 23

55orover 43 16

All 32 23

Source: Table A45 Credit, Debt, and Financial Difficulty in Britain, BIS, 2009/10

4 or more typesof unsecured

credit

Very weak

Low/ moderately low


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Asmentioned, only 15%of the youngest groupsare considered to have a moderate/high level offinancial awareness, yet over one-third have low/moderately lowlevelsoffinancialawareness.Thissuggests that much more needs to be done totargetyoungergroupstoimprovelevelsoffinancialcapabilityandraiseawarenessoftheconsequencesofgettingintodebt.

Table 12: How different age groups prefer to obtain debt advice, %

Face to Don’t face Phone Website know

18to39 31 42 18 8

40to54 37 38 22 4

55orover 39 46 10 6

Total 35 42 17 6

Source: Figure D7: Credit, Debt, and Financial Difficulty in Britain, BIS, 2009/10

Aswenotedinthepreviousreportforthisseries,significant numbers of financially vulnerableconsumersdonotseemtobegettingdebtadviceattheemergencystage(whenalreadyindifficulty)or preventative stage (when at risk). This shouldbe a priority for policymakers, theMoneyAdviceService(MAS)andotherswhoprovidedebtadvice.However, for this to be effective, the delivery ofdebtadviceshouldmeettheneedsandpreferencesof consumers.As table12 shows, there are cleardifferencesinthewaydifferentagegroupspreferto receive debt advice. Perhaps not surprisingly,older groups prefer the human touch either viaface-to-face or telephone, and are less likely topreferadvicedeliveredonline.


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As well as developing interventions to protectvulnerable households who are already facingseriousdebtproblems,thisreportraisesmajorlongtermpublicpolicyissues.Personaldebtwillbeoneof the singlebiggest influenceson thequalityofhousehold finances in theUK and indeed on thesustainability and behaviours of the UK financialservicesindustryoverthenextdecade.

Thechangingdebtlandscapeisdifficulttoforecastwithprecisionatagranularhouseholdlevelgiventhelackofcomprehensivenationaldata.However,it iscertainthatseriouspressuresarebuildingupinthefinancesofUKhouseholdsbothintheshort-mediumandlongerterm.Theanalysishasallowedus to identify those groups who are particularlyvulnerable.

As we repeatedly stress there seems to bea sizeable number of households who stillface serious debt problems in older age –whether comingup to retirementor actually inretirement.However, thegroupswhoappeartobemostvulnerabletogenerationaltrendsarethemiddle-aged(whohavethehighestDTIsandarefinancially vulnerable), andof course, in future,thosewithstudentdebt.

The future course of student debt is set out inTable6(p13).Butfor‘young-middle-age’groups,thekeyquestionistowhatextenttheywillbeabletofollowthehistoricdebt-assetslifecyclemodel.Wehavegraveconcernsthatmanyhouseholdsintheseagegroupswillfaceveryuncertainfuturesbecauseofthelegacyofdebtaccruedintherunuptothefinancialcrisisandpoorfutureearningsprospects.

Wethinkitisquitelikelythatthe‘debtbulge’willeventuallyshiftuptheagerangetooldergroupsas awave of householdswith stretched incomesstartrepayingdebtatalaterageandfinditmoredifficult to build up assets. This has major longtermconsequences(seebelow).

PAYING DOWN DEBTSome households are in a position to pay downdebts.However, others are clearly unable to. Therecordlowlevelofinterestratessimplyprovidesabreathingspaceformanyhouseholdsratherthananopportunitytoreducemortgagedebt.Thelargeriseinthenumberofinterestonlymortgagesalsosuggestsmanyhouseholdsarenotinapositiontopaydownmortgagedebt.

Recent trends show a concerted effort byconsumers topayoffunsecureddebt.Data fromthe British Bankers Association5 shows that thevalueofoverdraftsandpersonalloansoutstandingfellby£125millionovertheyeartoAugust2011.Although credit card debt outstanding increaseddue to interest, consumers actually repaid morethantheytookoutoncreditcards.

However,thepicturewithmortgagedebtismoreconcerning. The sheer scale of mortgage debttakenoutmeansthat itmakesbyfarthebiggestcontribution to the record levels of debt accruedin the UK. The interesting question is whetherhouseholdshavebeenusingthelowlevelofinterestratestoincreasethepaceatwhichtheypaydownmortgagedebt.

Themostrecentresearchsuggeststhattheyhavenot.Over the period January 2006 to September

5 http://www.bba.org.uk/statistics/article/august-2011-figures-for-the-main-high-street-banks,seeTable6

5. HARD TIMES AND POLICY IMPLICATIONS


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2008whentheaveragemortgageinterestratewasaround 7%, households – on aggregate – madean average of £1.4 billion worth of lump sumpayments tomortgageseachmonth.However, incomparison,fromOctober2008toFebruary2010when mortgage interest rates averaged around4%, households on aggregate made lump sumpaymentsofaround£1.05billionamonth6.

It appearsmanyhouseholds areonly able topayofftheinterestontheirmortgageorarerelyingontheforbearanceoftheirlender.Whileweestimatethat 11% ofmortgages are currently in financialdifficulty, it appears borrowers with interest-onlymortgages or non income-verifiedmortgages aresignificantlymorelikelytobeinfinancialdifficulty.

The share of interest-onlymortgages rose duringthe2000sfrom13%atthestartofthedecadetonearlyone-thirdin2007.Three-quartersofinterest-onlymortgagesdonothavea repayment vehiclespecified7.Itmaywellbethattheseborrowersdohavesomemeansofrepayingtheirmortgagebuttheverylargenumberwithoutameansspecifiedisaveryrealconcern.

AccordingtotheFSA8,intheperiodApril2005toMarch 2010, income was not verified on almosthalf of all new mortgages (45%). And in 2008,morethanhalfofmortgages(52%)werearrangedwithoutincomebeingverified.TheFSAestimatedthatattheendof2009,21%ofthesemortgageswereinarrearsoralreadyinpossessioncomparedtoaround6.5%ofmortgageswhere incomewasverified.

The FSA’s analysis of householdswithmortgagesshows that going into the financial crisis, manyhouseholdswere already infinancial trouble. The

FSAcalculatedthatbetween2005and2008,46%ofhouseholdswithamortgagehadnomoneyleftorhada shortfall thatwouldhave tobecoveredfrom savings or credit9. The position was worsefor the lowest incomehouseholds. 55%of thoseinthethirdlowestincomedecile,60%ofthoseinthesecondlowestincomedecileandnearly75%ofthoseinthelowestincomedecilehadnomoneyleftattheendofthemonth.Themedianshortfallforthosegroupswasbetween£500-600permonth.

This is likely to present more of a problem formiddle-agedconsumerswithhighmortgagelevels,and those groups approaching middle-age whohaverecentlytakenonsecureddebts.Asthisreporthaspreviouslyshownthemediansecureddebtofthose in,orcloseto, their40s iscloseto3timesgreaterthanthosehouseholdsover60.Withhighlevelsofsecureddebtthisgroupismostlikelytobehitbyinterestraterises,soitisespeciallyconcerningthat theveryhigh levelsof secureddebtarealsoconcentrated in these middle-age and ‘youngermiddle-age’ groups. BIS research has found thatbetweenafifthandaquarterofhouseholdaged25-54 have secured debt greater than £150,000(seeabove).

Sohowhavethesehouseholdsbeensurviving?Asexplainedpreviously, lendershavebeenexercisinggreaterlevelsofforbearancetowardsborrowersintroubleandinterestrateshavebeenlow.However,there are other possible ‘coping’ strategies.One way is to obtain a further advance on themortgage.TheFSAestimatesthatbetween2007-09,furtheradvancesaccountedfor22%ofallnewloanswithanaveragesizeof£25,000.Thiscouldallow borrowers to conceal mortgage paymentproblems.TheFSAcalculatesthataborrowercouldcovera£600permonthshortfallfor3yearswith

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6 FSAMortgageMarketReview(MMR):ResponsibleLending,CP10/16,Exhibit2.10http://www.fsa.gov.uk/pubs/cp/cp10_16.pdf7 FSAMortgageMarketReview(MMR):ResponsibleLending,CP10/16,Exhibits3.1,3.28 FSAMortgageMarketReview(MMR):ResponsibleLending,CP10/16,Annex3http://www.fsa.gov.uk/pubs/cp/cp10_16.pdf9 FSAMMRResponsibleLending,CP10/16,Annex3,Exhibit2.3


21

afurtheradvanceof£25,000ataninterestrateof5%perannum.

‘Coping’ strategies and policy interventions (andrecord low interest rates) have shielded manyhomeownerswithextremelyhighofdebt-to-incomelevels from the full effects of over-indebtedness.However,itisnotclearhowlongthiswillcontinue.Itisimportanttorecognisethatmanyhouseholdswithlargemortgagedebthavenotfaceduptothefuture.Theyaresimplystoringupagreatdealoftrouble and will live for much longer with hugedebts.

FUTURE INCOMESAs the previous report in the series shows, thegrowthinpersonaldebtfaroutstrippedthegrowthinearningsinthe2000ssothattotalhouseholddebtwasequalto160%ofhouseholdincomesby2010.Changing the trajectoryofdebt so thatdebt as aproportionofincomesreducessignificantlyrequiresearningsgrowthtooutstripgrowthinpersonaldebt.

However, a number of recent studies stronglysuggest that many households will actually seesubstantialdeclinesintheirrealearnings,certainlyin the short term. Research by the IFS suggeststhatlivingstandardswillcontinuetodeclineuntil2013/1410.NewanalysisbytheTUCestimatesthatby 2013, lower-medium income households willlosebetween6-10%oftheirearnings11.

It is very difficult to see how households onlower-medium incomes will be in a position topay down debts in the short term given thisvery gloomy prognosis for short term earningsgrowth. Long term debt reduction will dependon long term upward income mobility for theseover-indebted households. The future for long

term incomemobility isoutside thescopeof thisresearch.However,weurgepolicymakersandotherstakeholders to focus research on the potentialfor incomemobilityamongstyounger-middleagegroups as this will have serious implications fordebtmanagementinthelongterm.

IMPACT OF STUDENT DEBT Recent estimates suggest that a new generationofyoungpeoplecouldendupwithtotal studentdebts of £53,00012. It couldbe argued that debtisbeingnormalisedtoanevengreaterdegreeandatayoungeragethanhithertohasbeenthecase.This is likelytomakeitmoredifficultforyoungergenerations without access to financial support(or inheritances) to buy their first home. Again,thisislikelytoresultinhouseholdshavingdebtforlongerandfindingitmoredifficulttobuildupnetfinancialwealth.

GETTING ON THE HOUSING LADDERThere isnoquestion thatgettingon thehousingladderismoredifficultforFTBsinthepost-financialcrisis world. The Council of Mortgage Lenders(CML) estimates that before the credit crunch, atypicalFTBborrowedaround90%ofthevalueofthepropertys/hewasbuying.Thismeantthats/hewouldneedtopayadepositof lessthan40%oftheirannualincome.However,postcreditcrunch,loan-to-value (LTV) ratios have become muchtighter with the result that many FTBs are nowpayingadepositequivalenttooneyear’sincome13.

Notsurprisingly,thenumberofFTBshasdroppedconsiderably. Pre-credit crunch, over the period2005-2007,thenumberofloansadvancedtoFTBseachquarteraveragedalmost100,000.However,from2008-2010,thenumberofloansadvancedtoFTBs fell to justunder50,000eachquarter14.The

10 TheGreatRecession,IFS,http://www.ifs.org.uk/pr/frdb_recession.pdf11 TUC,UnhappyFamilies:Howordinarypeoplearepayingthepriceforausterity,September201112 Source:PUSHStudentDebtSurvey,http://push.co.uk/student-debt-survey-2011/13 http://www.cml.org.uk/cml/publications/newsandviews/83/303

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22

moreconstrainedlendingconditionsmeansthatalargerproportionofFTBswhodomanagetogetonthehousingladder,arerelyingonfinancialsupportfromtheirparentsorgrandparents.

Table 13: FTBs aged under 30 who required financial assistance, %

FTBs under 30 All FTBs

2005(Q2-Q4) 38 20

2006 41 22

2007 47 26

2008 61 34

2009 84 47

2010(Jan-Oct) 84 45

Source: CML analysis of Regulated Mortgage Survey, CML News and Views, February 2011, Table 2

It is important to note that the data in Table 13does not mean that the number of parents orgrandparents helping FTBs has doubled. Whilethe proportion hasmore thandoubled, the totalnumber of FTB loans advanced hasmore or lesshalved.ThisimpliesthattherehasbeenarelativelysmallincreaseintheactualnumberofFTBsgettingfinancialhelpfromparents/grandparents.

However,whatthedatadoessuggestverystronglyisthattheopportunitytogetonthehousingladderatanearlyageisbecomingincreasinglyrestrictedto those FTBswho are older orwhohave accesstofinancial help. In the 3 years in the runup tothe financial crisis, the average age of FTBswhodidnotreceivefinancialassistancewasaround33.However,postcrisis,thishasrisento3715.

Inheritances also play a big role determiningwhether people can buy a property in the firstplacenotjusttheageatwhichtheybuytheirfirsthome.72%ofhouseholdsinsocio-economicgroup

Ereceivednoinheritances,comparedto62%fromgroupD,60%ofthose intheC2,51%intheC1,and42%intheABgroups16.

In the past, the property market in the UK hasbeen a very powerful transmission mechanismfor accumulating and transferring wealth acrossgenerations, and enhancing future incomes –especiallyforthosefortunateenoughtoenterandexitthepropertymarketattherighttime.Whetherornotfuturegenerationswillbenefittothesamedegree will of course very much depend on thefuturepathofpropertyprices.However,ifpropertypricesdoreturntotrendgrowth,youngerpeoplefortunateenoughtogetfinancialassistancefromfamilytogetonthepropertymarketwillbenefittoamuchgreaterextentfromthelifecyclemodelofdebtdecumulationandwealthaccumulationthanyounger people who have to find the necessarydeposit themselves. So in effect what we see inmanycasesisarecyclingofdebt-generatedwealthfromoldergenerationstotheirdependants.Thisinturnperpetuatesexistingdisparitiesinwealthandincomeswithincurrentgenerations.

WIDER SOCIO-ECONOMIC CONSEQUENCESThemainconclusionthatemergesfromthisreportis that we could be seeing a major change tothe historic relationship between debt and assetaccumulation.

Aswenotedinourpreviousreport,thereisaratherfrustratingandworryinglackofgooddetailedtimeseriesdatarelatedtothedebtcircumstancesofUKhouseholds.But, lookingattheavailableresearchdata there is a sense that if economic trendscontinue many of the current younger-middleagegenerationofhouseholdswhocurrentlyhavehugesecuredandunsecureddebtswillnotbeable

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14 http://www.cml.org.uk/cml/publications/newsandviews/83/30315 CMLNewsandViews,August200916 Table3.2,AttitudestoinheritanceinBritain,KarenRowlingsonandStephenMcKay,JosepehRowntreeFoundation,2005


23

to look forward to previous patterns of incomegrowth, associated debt repayment, and assetaccumulation.Manyhouseholdswith largedebtsareatbesttreadingwaterandwillnotbeabletolookforwardtoincomemobilitytoliftthemoutoftrouble.

Thishasworryingimplicationsintheshort-mediumterm. Themost obvious is the need to tailor thedelivery of debt advice to meet the needs ofconsumers’changinglives.

However, we fear that this legacy of debt haswiderimplicationsforhouseholdsandthefinancialservices industry ifasweexpect theUKeconomyentersasustainedperiodofhighdebt,lowgrowth,low interest rates/ financial returns, and higherinflation.

Thedebtlegacywillremainwithusforlongerthanis usual with many households left with a hugedebtburdenforyears tocome. Inthe longterm,theneedtorepaydebtsforlonger,andtheinabilitytobuildupassetsand incomeswill surely impacton the retirementplansofmanyhouseholds.Wemayalsoseeanincreaseinproblemmortgagedebtamongstolder retiredhouseholdsas thewaveofover-indebted late middle age households movetowardsretirement.Thissurelypointstotheneedtorevisittheroleofequityreleaseinhelpingolderassetrich,incomepoorhouseholds.

Making sure that households get advice at theearliest stage must be a priority. Those who canafford to should pay down debt in case interestratesdoturn.Wehaveaspecificconcernaboutthenew national pension scheme NEST that is beingintroduced from 2012.We are very supportive ofNEST. It isamuchmoreefficientwayofproviding

pensionsthanpersonalpensions.Buttheveryhighdebt-to-income ratios evident in the NEST targetgroup(low-mediumincomes)meanstheywillneedgoodadviceorguidancebeforedecidingonwhethertopaydowndebtsorauto-enrolintoNEST.

Householdswhodonothavearepaymentmortgageinplace(orwhohaveswitchedtointerestonly)mayfind debt a burden formuch longer. The currenthigh level of forbearance exercised by lenderssuggests there is already a hidden problem. Ontopofthis,thelowinvestmentreturnsmeanswemayneed to startworryingagainaboutwhethermortgage endowment policies are on track torepaythemortgageprincipal.

In the absence of tougher consumer creditregulation, we have serious concerns aboutfinancially vulnerable households being targetedbycommercialdebtmanagementcompanies.Thecombination of lower disposable incomes anddownward pressures on profitability means thatthe industry is likely to focusevenmoreonmoreprofitable, less riskyconsumers.Thiswill result ingreaterfinancialexclusion.

To conclude, the combination of the debt legacyandaneweconomicparadigmoflowgrowth,lowinterest rates/ financial returns, and higher thanexpectedinflationcouldhaveseriousconsequencesfor households, industry and policymakers. Thiswillhavemajor impactsonhouseholddisposableincomes,consumerbehaviour,accesstoproducts,product pricing and design, investment returnsand attitudes to risk, sustainability of businessmodels, and both consumer protection andprudential regulation. Policymakers, regulators,andconsumerrepresentativesshouldplanforthisnewenvironment.


2424


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Chart A1: UK housing market ‘lottery’

Source: Nationwide House Price Index

Table A1: Annual growth in student debt outstanding, £

Financial year Total Amount paidend outstanding annually £billion £billion

2012 35 1.7

2013 39 1.8

2014 44 2.1

2015 50 2.3

2016 57 2.6

2017 64 2.8

2018 72 3

2019 80 3.3

2020 87 3.5

2021 94 3.8

2022 101 4.1

2023 107 4.3

2024 114 4.5

2025 120 4.8

2026 126 5.1

2027 132 5.4

2028 136 5.8

2029 143 6.1

2030 148 6.5

2031 153 6.9

Annualised % growth 7.7 9.4

Source: BIS response to Freedom of Information request, http://www.scribd.com/doc/63078079/LC-exclusive-Student-Debt-Forecast

Table A2: Use of credit for everyday expenses by age, %

All the Once in a time while

18to24 12 10 22

25to39 14 17 31

40to54 14 16 29

55orover 7 11 18


Table A3: Likelihood of needing to borrow more money in next 3 months, %

Very/ fairly likely

18to24 19 56

25to39 15 62

40to54 11 67

55orover 5 82


Table A4: Households in arrears or insolvency, %

In arrears/ insolvency

18to24 8

25to39 15

40to54 15

55orover 7

All 12


ANNEX 1: ADDITIONAL CHARTS AND TABLES

Either

Very/ fairlyunlikely

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Tel: 0207 391 4586, www.inclusioncentre.org.ukA not-for-profit company limited by guarantee, Reg. No. 6272007

Debt anD the Family SerieS: rePOrt 2: Debt anD the GeneratiOnS · 2012. 2. 10. · REPORT 2: DEBT AND THE GENERATIONS 1 INTRODUCTION • This is the second in the Debt and the Family

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