We're heading for £1 trillion debts

FAMILIES went on a record spending binge last month, pushing Britain's personal debt total closer to an incredible £1 trillion.

The spree raised the prospect of a sharp rise in interest rates to try to cool things down.

The Bank of England was already under pressure to push up the base rate by as much as half a percentage point next month in a bid to take the heat out of the runaway property market and High Street spending.

Figures published on Thursday showed that mortgage lending in March was £24.5bn - a record for the month. That is 19.5% up on February, said the Council of Mortgage Lenders. And it is an increase of 25% on March last year, confirming that the property market is booming.

In addition, the British Bankers Association, which represents major High Street names, said credit card debt rose by £ 500m in March to £29.9bn.

The total amount outstanding on personal loans, overdrafts and other credit rose by almost £1bn. All the figures indicate that personal debt is set to bust through the £1trillion barrier this autumn.

Consumer groups and MPs have warned of a personal debt crisis. Yesterday even the Council of Mortgage Lenders warned against borrowing too much.

Director Michael Coogan said: 'In these circumstances, we would urge borrowers to think carefully about how they would cope with higher interest rates.'

Deirdre Hutton, chairman of the National Consumer Council, accused banks of recklessly chucking cash at people. 'Britain is in the grip of a credit binge,' she said. 'It has been reported that six million families have been caught in the debt trap and are having difficulties meeting re-payments.'

Citizens Advice said it has seen a 44% increase in pleas for help from those in debt over the past six years. It is dealing with more than one million debt inquiries a year.

Policy director Teresa Perchard said: 'Our research shows we are at a critical stage where personal debt problems threaten to overwhelm large numbers of people.'

Britain's economic boom of the last few years has been built on a property market bubble. But yesterday, the International Monetary Fund warned of the possibility of a crash. Of the £ 24.5bn new lending on homes in March, some £ 11.3bn was for new purchases - up by 24% on February.

The value of loans for people remortgaging rose 12% to £10bn. Some increased their mortgages by a total of £2bn to release cash to spend on their homes, holidays and cars.

A growing number of older people are increasing their mortgage to raise a lump sum to help adult children get a foot on the property ladder.

First-time buyers accounted for 31% of the house purchase loans - there were 34,000 compared with 30,000 in March last year.

Coogan said: 'It now seems clear the housing market has experienced an upswing in the first quarter of this year. Buyers who could not decide whether to enter the market last year may now be deciding to buy because they think they may be priced out of the market if they delay any further.

'But the scale of activity has been stronger than we would have anticipated. We expect the Bank of England to be watching the housing market very closely.'

David Dooks, director of statistics at the British Bankers Association said: 'Individuals' appetite for borrowing shows little sign of abating.'

City analyst Howard Archer, of Global Insight, said: 'The very strong mortgage lending in March, and a pick-up in consumer credit, add to the case for an interest rate hike in May.'

The Bank of England's monetary policy committee meets on 5 May to decide on interest rates. Its current rate is 4%.

But the banking industry yesterday denied that the UK is facing a debt crisis. The banks' credit card trade body APACS said its research suggests that just 4% of families have borrowed too much, while only 3.4% find repayments a heavy burden.

A spokesman said: 'Many reports have suggested over-indebtedness is a growing problem in the UK and that society stands on the precipice of a debt disaster. Yet the data we collect indicates this is not the case.'

However, some experts are concerned that many new homebuyers are not protecting themselves against rate rises by opting for fixed-rate deals.

Capital Economics, which has long been warning of a housing market crash, said it is alarming that three out of four new home loans are tied to variable interest rates.

'There is clearly a risk that recent buyers will find themselves in difficulties if they have underestimated the extent of future rate rises,' it said.