The total amount of personal debt in the UK has fallen for the first time since records began in 1993, the Bank of England has said.

Personal borrowing fell by £600m in July, taking the total owed by individuals down to £1.457 trillion.

There was a drop in both mortgage debt and other forms of borrowing such as bank loans.

The number of mortgages approved in July rose again to 50,123, suggesting property sales will continue to rise.

“Total net lending to individuals fell by £0.6bn in July, showing a net repayment for the first time in the series,” the Bank said.

The amount outstanding on mortgages fell by £400m as people repaid more than they borrowed during July.

The amount accumulated on what is called consumer credit, such as loans and hire purchase agreements, dropped by a net £200m, once a small rise in credit card borrowing of £92m was taken into account.

“Today’s news will not make happy reading for policy makers who have taken significant steps over the last year to encourage greater volumes of lending throughout the economy,” said Benjamin Williamson at the centre for Economics and Business Research (CEBR).

“While today’s data are surprising, it is important to remember that this monthly net change is relatively small given the stock of lending in the economy,” he added.

Still subdued?

The increasing number of mortgages approved, but not yet lent, is widely seen as a good indicator of future trends and indicates that the revival in sales seen this year will continue into the autumn.

The BSA expects the mortgage market to remain similarly subdued over the remainder of 2009
Adrian Coles, BSA

July’s increase in mortgage approvals was the sixth monthly rise in a row and took the number of approvals to nearly twice the level recorded last November.

If sales continue to rise then prices may continue their recent pick-up as well.

“The mortgage market continues to show signs of some sort of recovery when compared to the first few months of this year,” said Adrian Coles, director-general of the Building Societies Association (BSA).

However he pointed out that activity was still much lower than in previous years.

“The BSA expects the mortgage market to remain similarly subdued over the remainder of 2009,” said Mr Coles.

The Royal Institution of Chartered Surveyors (Rics) warned that the reduced number of lenders in the market would put a cap on any increased mortgage borrowing.

“The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to potential homebuyers,” said the Rics chief economist Simon Rubinsohn.

Analysis

It’s payback time. For the first time since records began in 1993, British consumers opted to repay more of their debts than the amount of new money borrowed in July.
According to the Bank of England, the number of monthly mortgage approvals has crept up slowly this year, suggesting the appetite for lending is picking up a bit.

But that seems to be outweighed by homeowners who want to reduce their mortgage borrowing. Anyone on a tracker or variable rate mortgage has seen a big reduction in monthly outgoings.

So the question arises, what to do with the extra cashflow? Investing in shares or property may seem unattractive, so too the return on some deposit accounts. For some, paying off debt then appears to be the best option.

In theory, paying off some of the £1.4 trillion mountain of consumer debt is desirable. But a tendency for people to reduce debts rather than spending may not be helpful to an economy still in recession.

Hugh Pimm, BBC News