Home loan boom brings £888bn debt

DEBT soared to a record level as mortgage lending hit a new high in July, the Bank of England revealed.

The value of home loans handed out during the month - when interest rates fell to a 48-year low - was £22.5bn, against £22.1bn in June.

Britons borrowed a further £17.2bn on credit cards, store cards and personal loans as the spending spree continued.

The splurge took total personal debt to £888bn, up from £878bn in June. It is now almost £15,000 for every man, woman and child in the country and means the average household owes around £37,000.

The Bank's figures showed that families appear to be piling on the debt at unprecedented levels even after seeing their incomes fall following tax and National Insurance increases.

They are ignoring continuing concerns for the state of the economy and worries about rising unemployment.

The Bank has already warned that the seemingly inexorable rise in Britons' thirst for debt could end in tears, leaving many with bills they cannot afford and hitting the economy hard. The Liberal Democrats warned that the trend is dangerous for both families and the economy.

The beneficiaries of the debt boom are the banks and other lenders, who are winning big profits from interest and other charges imposed on customers.

Vince Cable, LibDem trade spokesman, said: 'The buy now pay later culture nurtured by this Government may mean consumers will regret borrowing so voraciously.

' With many households already seeing record levels of debt, the British consumer's love affair with the credit card may well end in tears.

'Many people appear to have an exaggerated sense of security that is not justified by economic indicators. Aggressive lenders must be reined in and the public need to be aware of the dangers of imprudent borrowing.'

A large slice of the home loans cash last month went to families who remortgaged to sustain their lifestyle and spending habits.

Experts have warned that schemes like 'mortgage equity withdrawal' may be running out of control. Under the schemes, lenders allow customers to increase their mortgages in exchange for a lump sum providing their home is worth more than the original loan. The cash will have been used for clothes, home improvements, holidays and furnishings.

The total amount of cash outstanding on home loans rose last month from £ 713bn to £722bn. There were 111,000 new loans for house purchase, the highest figure since November.

The total amount of consumer credit, which covers other lending, is now running at £166bn. The continued rise in borrowing will dash any hopes of another interest cut when the Bank's monetary policy committee meets this week to set rates.

One of the Bank's arguments for cutting interest rates to 3.5% in July was that there was less risk of boosting household borrowing. A cut is even less likely after data out yesterday showed a manufacturing revival.

The Chartered Institute of Purchasing and Supply/Reuters' Purchasing Managers' Index showed production at its sharpest rate for 15 months in August.