‘Danger thresholds’ for borrowers

It has often been assumed that only people with adverse credit histories, recent first-time buyers and some buy-to-let investors are at risk in a credit crunch. But now, anyone whose finances fall outside of certain defined thresholds is also vulnerable.

Fool.co.uk warns consumers to heed the Bank of England’s recent Financial Stability Report that the UK economy is still in danger from the world credit crunch. While there are comforting signs of a gradual recovery in the mortgage market, higher-risk borrowers should be aware that tighter credit conditions may re-emerge in the aftershock of the recent financial turmoil.

Some of the most likely to fall into arrears are those who fall outside the Bank of England’s defined danger thresholds. These are people with debt repayments of more than 55% of their household income, and net worth less than 33% of their income. This means that, for example, anyone with two thirds of their mortgage outstanding and no savings, should consider themselves in jeopardy.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “The two thresholds provide a handy guide for consumers to see if they are sitting ducks. And by ensuring that we stay comfortably within them, we should be better placed to face unexpected shocks.

“Consumers should draw up a Statement of Affairs immediately to get a useful snapshot of their finances. The snapshot will tell, at a glance, whether you fall into one of the ‘at risk’ categories.

“Failing to draw up a Statement of Affairs in the current difficult financial climate is tantamount to driving a car without shock absorbers. It may get you from A to B, if you’re lucky, but the ride won’t be nearly as comfortable as one that has.”