Consumers repay record levels of debt as new home loans rise

Britons cut their credit card, loan and overdraft debts by £579m in October

Consumers paid back a record amount of unsecured debts in October it emerged yesterday. Yet it proved a mixed day for the British economy as a slump in consumer confidence sent sterling spiralling to a one-month low against the euro, despite a rise in mortgage approvals.

The Bank of England reported that unsecured loans, which include bank loans but not mortgages, fell £713m in October, the largest month-on-month decline since its records began in 1993. Unsecured borrowing in the UK now stands at £228bn.

The fall in net consumer credit was a record £579m, despite a credit card borrowing rise to £134m. Howard Archer, the chief UK and European economist at Global Insight, explained it as "many consumers' desire to reduce their debt, low demand for credit and a lack of availability of unsecured credit from banks". The Bank noted consumers' need to improve their finances "as a major factor that could limit consumer spending, and hence economic growth, for some considerable time to come," he added.

The Bank also revealed that mortgage lending rose £922m in October, its 11th month of gains. The number of loans approved for house purchases was 57,345 – a 19-month high and just over 1,000 more than in September.

Mr Archer cautioned that the rate of improvement in housing market activity was "modest overall", with the upside "still being constrained by largely unfavourable economic fundamentals", including rising unemployment and weakening wage growth.

The Building Societies Association (BSA) also put out numbers yesterday, showing that the value of building society mortgage approvals last month was £1.51bn, slightly down from September's £1.56bn. Adrian Coles, the director general of the BSA, noted "modest improvements in the housing market in recent months" but warned: "Lending remains subdued compared to previous years. Funding conditions remain difficult and the supply of properties to the market is low, frustrating any increase in demand for house purchase." The trade body pointed out that building societies savings fell by £939m in October, the eighth consecutive month of outflows. Mr Coles said: "There is little incentive for people to increase savings whilst the bank rate remains at its current low level, and many may opt to repay debt instead."

Separately, the monthly survey by GfK NOP found that UK consumer confidence had marked a surprise decline in November. The index fell to minus 17 from minus 13 the previous month, the first fall since January.

GfK said consumers were less willing to make big purchases, while their view of the previous year was worsening. The assessment of their personal finances for the past and coming year also worsened. Mr Archer said: "This was clearly influenced by news that the economy had continued to contract in the third quarter, defying widespread expectations of a return to growth." Nick Moon, the managing director of GfK's social research operation, said the figures would come as a "real blow" to the Government.