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

Toby Clark a senior fiscal analyst in MINTEL comments on that point is a major(ip)(ip) need for pecuniary education and for a drive to prompt borrowers to strickle a fresh look at their debts. With come in a detailed collar of exactly how much they owe and what rate they atomic number 18 paying, it is easy to define how the location could spiral out of control. This statement clearly highlights the prospect of the medium British consumers as far as their owe and non- owe debts ar concerned.It is find by the tarradiddle from MINTEL that the British consumers who collect undischarged owe debts afford a better control on the amount of their outstanding than the non-mortgage debt consumers. When the mortgage holders were asked to estimate the amount of the outstanding loan they could estimate the mannequin at ? 92,200 which matched with the estimation of ? 95,000 do by Bank of England and mortgage l give noniceers. There ar various character references for whic h the consumers obtain mortgage and non-mortgage loans.The purposes in the like manner differ mingled with distinct income earners. The high income earners borrow for paying a house, buying a second home or for paying the university or school fees of their children. Whereas the pathetic income earners hurt totally different purposes of taking the loans like bringing up their children paying their tax bills or meeting their regular commitments. Irrespective of the purpose for which the loans are driven the loans do have an conflict on the financial soundness of the borrowers.On few occasions and for few consumers the loans become handy to take take of their financial struggle but in most of the cases the loans have had adverse stupor altogether on the lives and pecuniary resource of the consumers. Especially when the mean(a) consumer does not even know the extent of their debts the electrical shock would be passive worse. Many debt problems are ca utilize by execr sa tisfactory decision making, with taking on more debt to pay back what debt you already have not incessantly a wise move, according to the free and impartial debt advice organisation Debt quit Direct. (Linkroll) In most of the cases the consumers get in to debt traps either due to poor decision making or not being accurately able to assess the impact the debts have on their financial capabilities and standing. This includes the decisions of debt consolidation. Quite practically consumers think that debt consolidation is the best solution for solving their debt problems which matter simply aggravate the burden to the already debt trapped consumers. The loan burden on the borrowers is make to impr everyplace by the actions of the l stopping pointers withal.Luring the customers in tot taking surplus loans with the intention of just increasing their l set asideing 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 number of Britons stem that their debt problems are causing them difficulties in new(prenominal)wise areas of their life, according to a mod study. In seek carried out by R3 the Association of Business retrieval Professionals atomic number 53 out of six consumers are express to be otiose to manage with repayments on secured loans and recognition cards. (loanword Arrangers)With this land I imply to take out an analytical study of the British Loan Market and its impact on the sightly British consumers. In the process I similarly intend to study the multifariousnesss of mortgage and non-mortgage loans available to the consumers in the UK. 1. 1 explore OBJECTIVES This study has among other things the fol measlying central objectives 1. Studying the psychological and efficient reasons for the British consumers getting in to the debt trap. 2. Analytical study of the impact of the non-homogeneous loans on the lives and financial wellbeing of the clean consumers including mortgage and non-mortgage loans.3. Studying the mathematical function of the banks and other lending institutions on extending the debt burden of the clean British consumer 1. 2 RESEARCH QUESTIONS This study by undertaking a detailed interrogation in the subject tries to find plausible answers for the following research promontorys 1. What are the prime reasons that make the British consumers to get into the debt trap? 2. What are the major impacts that the mortgage and non-mortgage loans have on the lives of the total British consumers? 3. What are the different ways that an average British consumer sack up manage the debts exploitively? 1.3 organise OF THE DISSERTATION In order to present a comprehensive wallpaper I intend to divide the paper into the different chapters. firearm chapter 1 introduces the subject matter of the study to the readers along with stating the research objectives and questions, chapter 2 makes a detailed re popular op inion 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 have included the findings of the research and a detailed discussion on the analysis of the findings.Concluding remarks recapitulating the adds discussed in the paper and few suggestions which ordain enable the British consumer to manage his debts are included in the chapter 5. CHAPTER 2 LITERATURE check up on CAPM, Bonds, Securities, Economics, Finance This chapter presents a detailed review of the available literature on the debt creation by the British consumers and the impact of such(prenominal) debt creation on the bond and securities market, on the finance and pecuniary constitution and scotch web site of the res publica apart from the life styles and financial status of the separate consumers. 2.1 tint OF DEBT origination ON BOND AND SECUR ITIES MARKET A latest report from Bloomberg. com says European 10-year bond yields held near a three-month low as an Australian hedge fund filed for bankruptcy protection on losses related to a slump in U. S. home loans, prompting speculation global frugal refinement will slow. (Lukanyo Mnyanda, 2007) There has been a widespread perplexity rough the future of the bond market because of the higher take aims of failure in the sub prime mortgage repayments. This phenomenon has also been felt in the UK which is translucent from the statement of the recognition rating firm Standard & Poor.Standard & Poors utter business conditions for securities firms are worse than in the second half of 1998 when profession revenue slumped 31 percent after Russias debt default. Revenue from investment banking and business could fall 47 percent in the final six months of this year, the ratings family said. (Lukanyo Mnyanda, 2007) 2. 1. 1USE OF OPTIMIZING MODELS IN THE CONTEXT OF CONSUMER DE BT On the basis of micro economic foundations on that point are certain models that analyse the promising economic consequences of morphologic changes in the deli actually.Though in general these models help 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 g everywherenment policy, and the preferences of economic agents. Subsequent changes in any of these structural characteristics would mean that those parameters, and hence the relationships in the midst of key economic variables, would be evaluate to change. (Bank of England) provided the optimizing models enable the analysis of the deep structural relationship which is dependent upon the individual variables in relation to the economic shocks and their identification. The optimizing models describe the intertemporal optim isation problems facing economic agents. They very much try to capture the interactions between the different types of agent in the economy (consumers, firms, goernment, foreign sector), to each one of which is assumed to solve well-defined slashing optimisation problems, subject to certain informational and technological constraints.These models can be used to analyse how economic agents might optimally respond to various subscribe to and supply shocks that have or might hit the economy, or to changes in the structure of the economy. Equally, they can be used to examine belike explanations for observed patterns of behaviour in the data. (Bank of England) These models are useful in Modeling consumer behaviour including consumer spend Applications to financial markets Analysis of the labour market Analysis of the role of silver One of such models being widely used is the CAPM which can provide useful insights into the reasons behind the financial market changes.However thither is a right limitation of this model is that it does not perform well in the empirical tests. 2. 2 IMPLICATION OF THE RISE ON THE HOUSEHOLD DEBT ON THE MONETARY policy It is observed that the increase in the place debt in the UK over the last three decades was the result of the continued increase in the owner-occupied buildings and the number of mortgages crapd as a parity of the total septs. The rhytidectomy in the prices till the time of the sub prime mortgage issue was also because of this increase private ownership of the houses.However it is participationing to note that the increase in the household debt didnt have much impact on the drug addiction growth. This was due to the fact that the households were focused on the accumulation of financial assets during the recent past. Finally, while it is possible that higher trains of debt whitethorn make household inhalation more sensitive to interest rate changes, this may tardily be offset simply by moderating th ese same changes. (Stephen Nickell) While there was some(prenominal) contraction in the economies of US and Ger more, the UK economy re principal(prenominal)ed salutary during the year 2001.There was a evidentiary relaxation in the monetary policies of the country during this finish and hence the UK economy witnessed an increase in the domestic look at though the situation was different with the world economy which was weak and was harm a fall in investments. The increase in the domestic read made the overall growth rate of the economy positive. However some of the economists were of the view that such a growth in the UK GDP as against the widespread recession in other developed countries was possible barely at certain implied costs.For Example in an article in The commentator dated 27th March 2005 Fred Harrison noted that Encouraged by low interest rates, mint went on a spending spree. They reduced nest egg and extracted equity from their homes to displace a economic consumption boom A alike view was expressed by Hamish McRae in his article in the The breakaway stated What is, however, clear is that the assent-fuelled spending boom is, one way or another, coming to an end. (The Independent dated 16th March 2005). accordingly it was observed that booming consumption resulted in a rapid expansion of debt. thus there has been a significant 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 following remark in the The Independent issue dated thirtieth July 2003 Britons piled on an all-time record amount of debt last month, triggering fears that consumers have embarked on an unsustainable borrowing binge that will end in a daunt reminiscent of the early 1990s 2. 2. 1 RELATIONSHIP BETWEEN INCOME, phthisis AND HOUSEHOLD DEBTSGenerally it is assumed that the macroeconomic policies of the UK government had resulted in a house price bubble c oupled with a boom of the consumer spending. Thus the economy got missed out from the impact of the global recessionary motions. However Stephen Nickell argues that over the period 2000 to 2003 which was supposed to be the consumption boom the average quarterly consumption growth was only 0. 77 percent very similar to the average consumption rate of 0. 72 percent that was existed over the last twenty five days.The consumption rate was also down the stairs the average consumption rate in the previous period 0f 1996 to 1999. From 1998 to the end of 2003, the proportion of post-tax income that was consumed was relatively flat, hardly evidence of a debt fuelled consumption boom. Nevertheless, mortgage equity withdrawal (MEW) plus unsecured credit growth flush from rough 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 fact that the ratio of consumption to pos t-tax income remained stable throughout. (Stephen Nickell) With this argument the author proceeds to state the majority of mortgage equity withdrawal leads to increase financial assets accumulation and not to increase consumption. Further it is also argued that there is a strong relationship between the aggregate secured debt accumulation and aggregate financial asset accumulation peculiarly in a period of rapidly spiraling house prices. similarly there is no strong relationship between the factors of aggregate consumption growth and debt accumulation. In that case the following will be the effect of the household debt on the monetary policy.2. 2. 2 HIGHER take aimS 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 risen 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 proportion of the houses carrying a mortgage.Another factor that contributed the increase in secured debts is the change in the mode of finance by leaving the front end loading of the repayment of mortgages. such(prenominal) a method of financing has lead to higher loan to income ratios. It also resulted in higher mortgages relative to income. Based on these basic antedate there are three arguments that can be support the view that the household debt is a predominant factor in the determination of the monetary policies. 1. The first 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 mission 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 spread outive Summary). Though any adverse economic shock will have the impact on the employment and the consumption levels, higher levels of debts will make the conditions worse. The excessive debt may still cause greater precautionary saving and a Brobdingnagianr drop in consumption. Overall, it is hard to tell whether higher debt levels will generate a significant additional cut back in consumption which cannot be special by easier monetary policy2. The second argument is based on the possibility that the there may be a cut in the consumption due 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 reduce the level of debts. This will create severe macro economic problems leading to large scale adjustments in the monetary policies. However this argument is countered by indicating that the tenderness of the secured debt holders being young and there may be occ asions that these population may behave in an irrational way to reduce the consumption.But such phenomenon can not be identified with a majority of debts. 3. The troika argument was based on the fear that with more number of lot the more will be the trouble when there is a snap in the lodgement market. This fear has become true presently with housing boom bubble exploding. If house prices fall by 30 or 40 per cent, more community with mortgages means more citizenry in negative equity. Of line of products, the consequences of this depend to some extent on the behaviour of lenders.If the mortgage debt continues to be treated as secured, even though some is not, past debt supporter costs remain unchanged. So a lot will then depend on the collateral damage associated with the collapse in the housing market and what caused it in the first place. The issue is, if some contingency happens in the housing market, does the fact that more spate 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 describe to have encountered debt problems as a result of becoming ill, with a thirdly (33 per cent) highlighting 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 repaid by the 50 percent people in the age host 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 settle 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 unexpected bills and charges over the previous year. On an average 79 percent of the British people have spent money on unbudgeted things and the average cost of such spending is estimated at ? 1375. whatever of the issues identified with the debt creation in the UK are? The private lending genss stood at ? 1,318 billion as of July 2007 signifying that the British consumers are indebted on an average twice as the citizens of other European Countries. The people with serious debt focussing problem are estimated at 7 to 9 million Britons. ? A majority of the people have no savings or clear plans for savings to meet any unexpected future expenditure. A proportion of less than 50 percent of the people only have made adequate provisions for meeting the exigencies of a drop in their income level or other serious financial difficulties.? Some important statistics regis ter that a substantial proportion of the population suffer from serious financial worries and resultant stress due to the increase of their debt burden. These statistics show that 74% of British couples find money the most difficult subject to talk about 32% lie to their partners about how much they spend on credit cards 35% are kept awake at nighttime worrying 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 terms of their cause and effect. Groups of people like those out of work, school dropouts, people from single parent families or dismissed 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 purposes depending on their life styles and call for for different purposes. The main reasons cited for increase in the debts of the consumers is the increased availability of the loans, overspending and the hope to buy instantly doing major purchases like purchase of cars or spending on a foreign 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 tha t create a debt trap for the British consumers 2. 4. 1EASY AVAILABILITY 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 buoyancy there had been an increased demand for the credit and the cost of such credit was low. The exceedingly competitive financial service industry had been innovative to find many a number of products to suit the needs of various strata of people. Today over 400 mainstream financial 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 unalike TACTICS OF THE LENDERS TO ATTRACT THE PEOPLE Although the banks do not explicitly pilfer or lure the vulnerable people to sell their financial services products, the products themselves have been so des igned in addition to the lending practices of the banks to score the vulnerable people. Such practices include aggressive marketing a drop of transparency in calculating the cost of borrowing 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 coefficient between serious indebtedness, 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 tip conducted in the year 2004 that 33 percent of the people in the UK are not confident enough to handle money issues and only 30 percent of them even knew the basi c 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 personal finances including availing of secured and unsecured loans.Such lack of financial knowledge will make them spread over in serious financial struggle as a result of unmanageable debts they have contracted. 2. 4. 4 LACK OF SAVING CULTURE The trend of todays Britain is buy now and pay later as against the traditional way of living of saving money to buy assets. This has soberly 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 settle 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 dra stically the situation of debt problems is likely to grow into greater magnitude. 2. 4. 5 MATERIALISTIC ATTITUDE OF THE MODERN club The attitude of the society towards borrowing and its effects on life has well changed over the last few decades. Credit is no more considered as dangerous as it was perceived 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 unnecessary objects, which could consequently impact upon their ability to handle their day-to-day fina nces. (Secured Loan News) The survey also revealed that half of all consumers own an expensive clothing item which they wear only occasionally and over 35 percent of them have unworn shoes. However, women were reported to be driving pointless fashion spending. Some 58 per cent of females were said to have unused 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 console or video cameras and cooking equipments, iterate purchase of fine china items, exercise equipments, beauty 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 demand 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 spring up in the last decade. According to the statistics released by Datamonitor unsecured Loans and borrowing via other forms of consumer credit fell 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 Datamonitor says A weaker labour market, combined 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 recorded for the year 2005. This outstanding debt figure was corroborated by the statistics rele ased 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 ? Total 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 equates to an increase of ? 117bn. ? Total secured lending on homes at the end of July 2007 stood at ? 1,140bn. This has increased 11. 0% in the last 12 months. ? Total 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. ? Average household debt in the UK is ? 8,856 (excl uding 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 every 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 equates 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 million every 4 minutes. (Credit Action) A pictorial representation of the growth in the UK personal debt is depicted below