Are we learning to save?
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Back in mid-2007, borrowing money seemed so secure, so easy, and so cheap. The Northern Rock Together deal, a 95% mortgage topped up with a loan of up to 30%, is now considered to be the defining image of the easy credit generation.
But plenty of other loans were easy to come by. We eventually had our hands on 56 million credit cards in the UK. In the meantime, our savings habit was waning. In 2008, we saved less than 2% of household income, compared with 10% in 1995.
First-time buyers and self-certified borrowers joined the party, and those starting a business were given easy access to credit. But eventually, as more risky borrowers started to default, and banks realised these bad loans had been packaged up with good ones, this easy access was over. The credit crunch became the household crisis we all know so well.
As financial institutions wavered, and occasionally collapsed, savers decided to value security over opportunity.
The official level of protection for deposits rose to £50,000 per saver per institution, but the government made it pretty clear it would actually cover all depositors’ losses if a bank went bust.
Yet a flight to safety was underway. National Savings and Investments (NS&I), which sees its profits go to the Treasury, received 340,000 calls in October 2008 compared with 85,000 in a typical month. The nationalised Northern Rock also saw a sharp inflow of funds.
There are an estimated 35 million people with savings of some type in the country, nearly double the estimated 18 million people who have mortgages. Yet the size of the borrowings and savings actually reveals that UK consumers borrow more than they save.
Total household savings in July 2009 stood at £1.1 trillion, with banks holding a 70.2% share, building societies 21.1% and NS&I 8.7%. In the same month, total outstanding lending to individuals, according to the Bank of England, stood at £1.46 trillion. Of this, £1.23 trillion was mortgage debt and £231m was other forms of consumer credit.
Personal debt was about £1 trillion lower in 1993 than it was in July 2009.
But in a notable development in July, UK households paid back more debt than they took out for the first time since the Bank of England started collecting data 16 years earlier.
There are several explanations for this. During the crisis, the Bank of England dropped the Bank rate and so variable rate mortgage holders saw their repayments drop significantly.
At the same time the returns on savings fell sharply. The Bank rate has remained at its record low of 0.5% since March, and the Bank’s governor Mervyn King recently implied that it could remain so until into 2011.
Consequently, those who have some funds to save or invest are looking to pay off debts, such as reducing the balance on their mortgage or paying off credit card debts. In July, the average individual paid back £10 more debt than he or she took out, but the average debt still stood at £24,000 each.
