Your Money: How deep into debt should you go?

Low interest rates mean poor returns on savings and good deals on borrowing. As a result, more consumers are going deeper into debt.

Low interest rates mean poor returns on savings and good deals on borrowing. As a result, more consumers are going deeper into debt.

Last week the Bank of England revealed that Britons took on a record £10bn of personal debt in June, bringing the total to £880bn. This works out at £15,000 per person.

The trouble is that loans look exceptionally cheap, so consumers don't tend to think too hard before applying. Debt can also be repeatedly transferred between credit cards with 0 per cent introductory offers, so there is never a need to pay it off.

And the lowest mortgage rates in nearly 50 years are encouraging buyers to take on bigger home loans - the only way many can get on the property ladder in a buoyant housing market, which has only recently showed signs of slowing.

Mortgage broker Charcol last week announced that it was increasing its income multiple so that people buying a property on their own can borrow five times their income (four times joint income if they are buying with someone else).

Charcol says it is launching this deal in response to customer demand. To reduce risk, applicants have to undergo strict credit checks and affordability assessments to see if they can service such a loan. And they also need to earn more than £35,000 (£50,000 joint income), as well as take on a five-year fixed-rate deal so they will be able to budget for their repayments.

But despite such checks, all the signs are that consumers are getting into debt with little thought for the consequences. There is a real risk that it could all go horribly wrong.

Steven Andrew, chief economist at fund manager Isis, believes consumers are making an "entirely rational decision to reduce saving and increase borrowing". Perhaps it is rational now, while rates are so low. But they are expected to rise next year, albeit modestly.

Rate hikes aside, plans to repay your debt could fly out the window if you lose your job or fall so ill that you can no longer work. If you haven't got some form of mortgage payment protection or critical illness cover, you could even end up losing your home.

We all need to be responsible about the level of debt we take on. If your finances are sound and you want, say, to buy a new car, there may be a case for remortgaging to release some equity from your property, instead of taking out a personal loan.

But if your finances are in disarray, with outstanding balances on several credit cards and a big overdraft, you would be better off trying to reduce your overall level of debt before taking any more on.

m.bien@independent.co.uk