A significant minority of consumers could experience financial problems because of their high levels of borrowing according to the Financial Services Authority (FSA) in its 2008 Financial Risk Outlook.

"We are concerned that many consumers are illprepared for a deterioration in
economic conditions and may have placed too much reliance on their ability to depend on cheap credit and housing wealth to sustain their consumption levels and investment plans," the report says.

Rising house prices, low unemployment and low interest rates has encouraged people to believe that the supply of cheap and readily available credit will continue according to the FSA. At the same time the savings ratio has declined sharply.

Deteriorating economic conditions and the effects of the credit crunch could bring an abrupt end to this way of thinking.

"There is a risk that some consumers could find it difficult to meet their credit commitments due to tighter lending standards for both secured and unsecured credit," the report continues. "Moreover, there is an increased risk that consumers who cannot meet the revised lending criteria of either secured or unsecured lenders, or who have few remaining assets to secure further loans, could be forced to seek some form of debt resolution with their creditors. The numbers of mortgage repossessions, bankruptcies and IVAs could therefore rise further."

The FSA also expresses concern about the estimated 1.4 million An estimated 1.4m short-term fixed-rate mortgages that are due to mature in the next 12 months.

It estimates that mortgage payments would rise by approximately £210 per month as a result of the rise in market interest rates over the period since the consumer took out the fixed rate, were the fixed-rate mortgage to be replaced by a standard variable-rate mortgage.

"There is a risk that for some borrowers this will have a serious impact on the affordability of the loan for some time. Consumers near the end of a fixed rate (or other product with a fixed term) will need to start planning early to be able to cope with the potential increase in the cost of these products."



January 31st, 2008