Bank warns consumers of debt overload

In its latest biannual Financial Stability Review, released on Wednesday, the Bank reinforced the message spelt out recently by Bank governor Tito Mboweni that the bias is towards higher interest rates. And the Bank warns that although banks and their clients are currently able to cope with record levels of household debt, this might change. “Although households are able to service outstanding debt quite comfortably, borrowers need to be aware that the benign environment may not continue indefinitely,” the Bank said. Household debt as a percentage of disposable income has soared in recent years, as interest rates have sunk to a 25-year low. The review points out that in the fourth quarter of last year, this ratio was at 65,6 percent, compared with 63,5 percent in the third quarter and 62 percent in 1997. This debt remained manageable, with households using a relatively small fraction of their disposable income to service it. There was thus “no clear threat to financial stability arising from any inability of households to service their debt obligations”, the Bank said. However, “the level of households’ indebtedness could entail risks should the current benign environment change”. The Bank also pointed out that a change had already occurred in the ability of borrowers to repay mortgage loans. Mortgage loans “overdue” ‘those that are more than 180 days overdue and either inadequately secured or uncollectible ‘ declined in December, even while mortgage debt continued to rise. “This trend appears to have subsequently changed as mortgage loans overdue increased by 5,5 percent in the year to February 2006,” the Bank said, while the ratio of overdue mortgage loans to total mortgage advances increased from 1 percent in the third quarter of last year to 1,2 percent in the fourth quarter. ‘ Business Day.

May 2006
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