Is Britain on the verge of another credit crunch?

Is Britain on the verge of another credit crunch?

The Bank of England is setting aside money as a ‘just in case’ situation should the UK be faced with another financial down turn.

Banks will set aside £5.7 billion this year as a cushion should borrowers be unable to afford their repayments on their loans.

Next year it is hoped to set aside another £5.7 billions, making a total of £11.4 billions to help with the future financial problem facing the country.

The problem has come as result of lenders being too relaxed with their lending.

It seems they may be lending to those that may not be able to afford their repayments in the future should their situation change.

For now the Financial Policy Committee for the Bank’s believe the financial situation seems to be good.

However, with the last credit crunch and the increase in those being accepted for loans to stop another crisis the Banks want to be ready for what may change or happen in the future to ensure as little impact to the country as possible.

With the increase of lenders that offer finance to those who have a less than perfect score, like Payday loans, it increases the chances of borrowers being unable to make repayments in the future should their situation change.

The finance industry has also seen an increase in credit card ownership, personal loans and car finance being taken out by households.

This type of borrowing has increased by 10% in the last year, but incomes have not increased alongside this change.

When it comes to writing off debt for unsecured debt in comparison to mortgage debt it is ten times more likely.

Mark Carney, Bank Governor, does not think the blame is on increased borrowing and advised that the majority of personal borrowing decisions are sensible.

Is Britain on the verge of another credit crunch banner
Is Britain on the verge of another credit crunch?

The Bank of England’s Plans

To put in plans for the future the Bank are using “stress test” to see if lenders can survive losses on loans that are not repaid.

The Bank is also putting in place ways to stop lenders getting around affordability tests, specifically on mortgages, so that they do not lend too much to those that can’t afford it.

Currently Banks and Building Societies can lend up to 15% of their mortgages to home buyers for those that borrow large loans of more than 4 ½ times their income.

Lenders must be very certain that the borrower is capable of affording the loan when the Bank of England raises the base rate by 3%.

However it seems that some lenders have anticipated that they would not pass on that and so have been lending a bit more.

Mark Carney has advised that some lenders seem to have forgotten lessons to be learnt from the last credit crunch but believes that the UK is stronger now than it was back then.

In contrast most UK homes have reduced their debt and it has only been in the last 18 months that personal lending and borrowing has increased.

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