The current state of the UK borrowing landscape

Financially, 2023 has been strenuous for the UK, with those who live and work in the country dealing with a significant increase in costs across the board.

This has been primarily driven by global events and the cost of living crisis, leading real wages (excluding bonuses) to fall by 3.1%, and causing essentials such as food, energy and travel to rise in price. In turn, to keep inflation rates at bay, the Bank of England (BoE)  increased interest rates, causing mortgages, and thus rent, to substantially follow suit.

As a result, the need to borrow money has increased, as has the withdrawals of savings.

‍With reports coming out about the potential for a mild, but short-lived recession at the end of 2023, it looks as if there is some way to go before the UK experiences comfort in its financial  position.

However, there is light – the Consumer Confidence Index (CCI) (the CCI measures a range of consumer attitudes, including forward expectations of the general economic situation and households’ financial positions, and views on making major household purchases) rose to -21 in September 2023, up by four points from -25 in August.

It’s small, yet it’s a start on the long road to recovery for the UK. 

Overall, the most recent Money and Credit Report (for July) from the Bank of England (BoE) showed us that consumer borrowing has decreased. Coupled with the findings from IPSOS and Fair4AllFinance stating that regulated firms have declined over 2.8 million applications between May 2021 - March 2023, it will take time, post-economic recovery, for many families and individuals to feel financially secure and free, especially those who may be considered financially vulnerable.

A short overview on the UK borrowing landscape in July 

Some key points from the Bank of England’s monthly Money and Credit Report in July 2023 (unless stated otherwise):

• Mortgages: The net borrowing of mortgage debt by individuals increased for the third consecutive month to £0.2 billion in July 2023, from £0.1 billion in June 2023.
• Consumer borrowing: Net borrowing of consumer credit by individuals decreased to £1.2 billion in July, from £1.6 billion in the previous month. This was driven by a fall in borrowing through other forms of consumer credit (such as car dealership finance and personal loans) to £0.6 billion in July, down from £1.0 billion in June, while borrowing on credit cards remained broadly unchanged for the third consecutive month at £0.6 billion.

Plus, the collective response from consumers and banks to the increased interest rates and the current economic environment:

• Mortgages: Net mortgage approvals decreased from 54,600 in June to 49,400 in July, while approvals for remortgaging slightly increased from 39,100 to 39,300 during the same period.
• Consumer borrowing: According to IPSOS for pressure group Fair4AllFinance, between May 2021 and May 2023, 2.8 million low income households had lending applications declined by regulated firms. This has created a ‘perfect storm’ in the credit market causing around 3 million people to turn to illegal lenders over the past three years.
• Mortgages: UK Finance reported there were around 90,700 mortgages in arrears of more than 2.5% at the end of June 2023. It was noted that this figure is well below levels seen following the financial crisis in 2008.

• Savings: Households withdrew a net £0.1 billion from National Savings and Investment (NS&I) accounts, following net withdrawals of £0.2 billion in June.

How the current market for loans can impact vulnerable customers

The long-term impact for the financially vulnerable are yet to be unseen. If there are limited financing options, or only options with high APRs, the ramifications of the current economic crisis will be felt for much longer by this subsect of customers than by others.

On top of that, with the loan market contracting over the last few years, those who are financially vulnerable may find themselves more likely to go to unregulated places for financing.

This comes with huge risks, both financially and at its most extreme, physically, with one loan shark admitting to City AM that they target those that struggle to repay their loans and that many lenders (although still extremely rare) have threatened physical violence.

The truth is that no one can be certain about what will happen tomorrow. Responsible use of credit can be very beneficial and most likely the best option when needed. It is to be expected that taking out any type of credit will always come with risk for both parties. Banks can contractually (and therefore, legally) increase mortgages to ensure its in-line with inflation rates, and customers can default. Both are undesirable scenarios, yet impact consumers the hardest.

As the UK continues to climb out of the current economic situation now and for the months to come, and as consumers deal with the consequences stemming from the cost of living crisis and increases to inflation rates, Kalgera is grateful to see the FCA’s Consumer Duty is now in place. Banks and financial institutions should be servicing those who are at a financial disadvantage, properly, and with the right systems in place.

To create a better environment and experience for those seeking a solution, financial institutions who provide loans and other types of credit can mitigate risks on their side and provide reasonable options for the customer by understanding the behaviours of those who will be hit hardest if one unexpected incident were to occur. This should be considered as a priority for lenders – it’s never too late to start helping those who are struggling financially, and equip them to have a brighter financial future.

About Kalgera

Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.

We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.

You can find our online training, in association with the London Institute of Banking and Finance (LIBF), here and more information over at our website.

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Photo by Andres Garcia on Unsplash

About Kalgera

Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.

We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.

You can find our online training, in association with the London Institute of Banking and Finance (LIBF), here and more information over at our website.