Struggling with the national debt

Britons saved more than they spent last year for the first time since the 1980s, but the bills from the boom years are proving difficult to pay off.

Man Looking at Sinking House

Not everybody has suffered financially due to the credit crunch. When the Bank of England slashed base rates to 0.5 per cent in March last year, Leanne Bugner and her husband, Troy Hewitt, watched their mortgage repayments drop by £2,000 (Dh11,000) a month. The couple had a £580,000 mortgage on their home in Fulham, West London, a two-year tracker deal charging just 0.49 per cent over the base rate. At first they were paying 5.49 per cent, but rate cuts shrank their rate to just 0.99 per cent, about as low as a mortgage can go.

Ms Bugner had no doubt what to do with the savings. "We used it to overpay our mortgage. Before the credit crunch we might have blown that money. Not now." Ms Bugner, 38, and Mr Hewitt, 39, like millions of Britons, have radically changed their attitude towards debt. The credit-fuelled spree of the boom years is over, and now the nation is desperate to repay the bill. During the boom years, when rates fell and property prices soared, Britons withdrew hundreds of billions of pounds in mortgage equity, and went on a spending spree.

Then came the banking crisis, and homeowners realised the party was over. Last year, they rediscovered traditional values with a vengeance after repaying a record £24bn of mortgage equity. Racking up debts was easy in the good times because homeowners could raise huge sums against the spiralling value of their property, says Ray Boulger, the senior technical manager at the mortgage brokerage John Charcol.

"Remortgaging wasn't a problem, even for borrowers with bad credit, and many people switched deals every couple of years," he says. "As property values rose higher, they built up more debt and remortgaged again. Some people used their home as an ATM machine." The recession could have led to a property crash and a wave of repossessions, but most Britons have escaped the agony, he adds. "Low interest rates have been a lifesaver for over-extended borrowers, slashing their mortgage repayments and supporting the property market."

The cultural shift has been dramatic. Last year, Britons saved more than they borrowed for the first time in 20 years. This is partly because the nation is becoming more prudent, and partly because nervy lenders have switched off the flow of credit. The question is whether an economy built on easy credit can survive an era of thrift, because every pound spent clearing debt is a pound that won't reach the high street.

Adding to the pressure, the new coalition government is speeding up the nation's debt repayments by aggressively hiking taxes and slashing state spending, which could tip the UK into a double-dip recession. For some homeowners, reducing the size of their mortgage is a necessity. For others, it is a dream. Ms Bugner and Mr Hewitt are lucky because time is on their side. Many older people aren't so fortunate. More than one in four people over 65 still have mortgage debt, owing on average £45,602, according to research from equity release specialists Key Retirement Solutions (KRS).

Half of all pensioners in the UK have outstanding mortgage, loan, credit card or overdraft debt, says Dean Mirfin, the group director at KRS. "The level of debt in retirement is very worrying and many pensioners are struggling to cope." Christine Avery, 84, didn't expect to find herself in debt at her age, but then a plan to help her children set up a themed restaurant fell victim to the recession.

Mrs Avery, who lives in the town of Honiton in Devon, helped her son, Pat, 53, and his wife Debbie, 52, buy a classic London Routemaster bus to convert into a restaurant. "I took out a £30,000 bridging loan to cover it," she says. "But the recession hit the area hard and the restaurant never took off. That left me with the loan." Mrs Avery owns a two-bedroom terrace home worth about £130,000 and unlocked the spare equity using an increasingly popular product called an equity-release mortgage.

This allows older people to borrow against their property, while retaining the right to continue living there. The capital and interest is then cleared from the proceeds of the house sale when they die. "The bridging loan is cleared now, which is a weight off my mind. It is never nice to owe money, especially when you get to my age," she says. Mrs Avery was fortunate. For many Britons, young and old, debt is a constant struggle. Personal insolvencies hit a record high in the first three months of this year, totalling 35,682, a rise of 18 per cent on the same period last year. It would be much worse but for record-low interest rates.

But many analysts fear the Bank of England will be forced to hike rates soon to control inflation, which hit 3.4 per cent in May, far higher than the Bank's 2 per cent target. For homeowners such as Mr Hewitt and Ms Bugner, repaying the mortgage is a prudent and frugal move. But for others, it is a desperate race against time.