Consumer binge adds £10bn to borrowing

Record increase in mortgage lending and consumer credit increase fears of Nineties-style crash

Britons piled on an all-time record amount of debt last month, triggering fears that consumers have embarked on an unsustainable spending and borrowing binge that will end in a crash reminiscent of the early 1990s. Total consumer borrowing rose nearly £10bn last month, the biggest jump ever and up a record 14 per cent on a year earlier, the Bank of England said.

Both consumer credit - £2.2bn of borrowing on plastic, bank loans and hire purchase - and a £7.8bn rise in mortgage borrowing were the largest increases since records began 10 years ago. The number of loans taken out to buy a home jumped by 17,000 to 108,000 - a six-month high - pointing to a surge in housing market activity. The latest increase means the total debt mountain hanging over the British public is worth £880bn - close to the entire annual wealth of the UK and equivalent to £15,000 for every man, woman and child in Britain.

Politicians and economists - and even the Church of England - warned that millions of people were vulnerable to being plunged into a debt crisis. "An almighty crash is on the cards," said Vincent Cable, the Liberal Democrats' trade and industry spokesman. "With debt levels so high a slight downturn in the economy could lead to ... record levels of bankruptcy."

Meanwhile the Doctrine Commission of the General Synod of the Church of England said people were in danger of mortgaging their entire lives. "When the repayment of the interest on our debts form such a significant proportion of our income, our lives become centred in practice around the service of that debt," it said. "Our future becomes mortgaged and our relationship to time is fundamentally reconfigured".

Roger Bootle, head of the consultancy Capital Economics that is forecasting a housing crash, said there were a range of factors that could remove the support for the current "debt extravaganza". "Anything from a rise in unemployment to a realisation that debt is not being eroded away in real terms like it was in the past, could cause households to take fright at the sheer level of debt they have built up," he said. "This would shock them into reducing spending to far below recent high levels."

The latest rush to borrow does not include any impact from the Bank's unexpected cut in interest rates three weeks ago that pushed mortgage rates to their lowest levels for half a century. Economists said the record jump in borrowing contrasted with the minutes of that meeting when the monetary policy committee said a rate cut was "unlikely to stimulate increases in borrowing".

John Butler, UK economist at HSBC, said: "This [debt increase] is in complete contradiction to the Bank's assertion and all this before consumers were rewarded with yet another rate cut." None of the 33 City economists surveyed by Bloomberg News expects another cut in borrowing costs when the MPC meets next week. "Today's explosion in consumer credit all but eliminates the chances of a rate cut at next week's meeting," said Ross Walker, an economist at Royal Bank of Scotland.

The mortgage industry insists there is unlikely to be a crash as the market is fundamentally different from the early Nineties when interest rates shot up to 15 per cent and unemployment rose rapidly. Employment is running at record highs thanks to massive job creation in the public sector offsetting redundancies in manufacturing and tourism. One possible shock would be a double-dip recession in the United States. Yesterday the markets were jolted by an unexpected slump in American consumers' confidence following a recent jump in unemployment.