The Bank of England has instructed the UK’s lending firms to collectively set aside some £11.4 billion to protect against customers defaulting on their loans. £5.7 billion of this will need to be provided in the next six months, and the remaining £5.7 billion by the end of 2018.

The Bank is known to be particularly concerned by a 10% annual rise in consumer borrowing.

According to the Bank’s Financial Stability Report, UK consumers owed £198 billion at the end of April 2017, excluding mortgage debt. This figure includes £72 billion in loans and overdrafts, £67 billion of credit card debt and £58 billion of car finance debt.

The Bank has also proposed a fundamental change to the way mortgage lenders are required to assess applicants’ ability to maintain payments in the event of a rate rise. The current requirement is to ensure that everyone approved for a mortgage could maintain their payments were the base rate to rise by 3%. However, some lenders have been getting around this requirement by assuming that they would not pass on all of a base rate increase to their customers. Hence, lenders will now be required to ensure applicants could cope with a 3% increase in the firm’s Standard Variable Rate.

Bank of England governor Mark Carney commented:

“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. And lenders may be placing undue weight on the recent performance of loans in benign conditions.”

Referring to the last credit crunch of around a decade ago, Mr Carney spoke of lenders “forgetting some of the lessons of the past, or not fully learning the lessons of the past.”

However, Mr Carney did acknowledge that “the resilience of the UK financial system has strengthened since the financial crisis.”

Debt charities have been warning for some time of impending problems in this area. Mike O’Connor, the chief executive of StepChange, commented:

“Any increase in borrowing costs could tip households, many of which are already on a financial knife-edge, into serious financial hardship.”

Joanna Elson OBE, chief executive of the Money Advice Trust, added:

“The Bank of England is right to take action to curb the huge growth in household borrowing we are seeing. While most households can cope with this extra borrowing now, many risk finding themselves exposed to financial difficulty should their circumstances change. In these uncertain economic times, the Bank’s intervention to limit this risk is welcome. We have already seen an eight percent rise in the number of people helped by National Debtline so far this year, and we expect demand for debt advice to continue to increase.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.