Journey into distress part 2 – the profile of debtors in difficulty

08 January 2020

A close analysis of the UK’s troubled borrowers confirms many intuitive assumptions about distress, but it also throws up some unexpected findings. Different borrowers experience distress in different ways - age, income and total debts tell only part of the story.

In part one we identified four groups that make up the UK’s population of borrowers: mortgage-holders, standard-cost borrowers, high cost borrowers, and a final group whose only significant debts are their household bills.

The research showed that those in a group whose main form of debt is in most cases high cost borrowing (for example payday loans and store cards) are roughly three times more likely to fall into financial distress.

But taking a deeper dive into each group we can uncover further patterns that distinguish the distressed from the non-distressed and may find clues as to why some people become distressed debtors and others do not.

For example, mortgage holders may be the least likely to suffer financial distress – but about 1 in 20 still do. What are the characteristics of those mortgage-holders who suffer distress and how do they differ from the non-distressed? You might think it’s those with the biggest mortgages. It isn’t.

Or how about high-cost borrowers who are the most likely to fall into financial distress. What makes these distressed individuals different from their fellow high-cost borrowers who don’t become distressed? You might think they would be the poorest of this group. But again, the intuitive answer is not borne out by the research.

It’s an age thing

It is by age that we can first identify a key feature that distinguishes those who fall into financial distress from those who do not and not just across the board, but also within each of our archetypes.

The graphs below illustrate the different age profiles in each of our archetypal groups for those who do not fall into distress (green) against those who do (red).

Mortgage-holders and high-cost borrowers – age and distress
Mortgage-holders and high-cost borrowers - age and distress

In the case of mortgage-holders the difference in age distribution between the distressed and non-distressed is minor. If anything, it shows those entering financial distress tend to be very slightly older than their fellow mortgage-holders who avoid distress.

For high-cost borrowers, we also see a relatively close correlation between distressed and non-distressed, with one key difference. Older users of high-cost credit are far less likely to suffer financial distress than younger high-cost borrowers.

When we look at the standard-cost borrowers and household bills only groups we see a much starker pattern.

Standard-cost borrower and household bills – age and distress

Standard cost borrowers - household bills - age and distress

In both of these archetype groups the age distribution between those who fall into distress and those who do not, are opposite. The individuals who suffer financial distress show a clear bias towards youth, while the large number of older users of these types of credit are unlikely to fall into distress.

So, while the research shows that younger borrowers are far more likely to use high-cost credit, it also shows that this alone does not explain their higher tendency towards debt problems. Among the users of standard cost credit and indeed even among those who main debts are simply household bills – it is the young who disproportionately fall into financial difficulty.

Is it all about earnings?

In most of the groups identified, there was a clear correlation between average income and financial distress. (As explained in part 1, the research used monthly current account turnover as a proxy measure for monthly income.)

Six months before falling into distress those who did so had on average markedly lower earnings than others in their group.

Among mortgage holders, those who went into distress had an average current account turnover that was 12% lower than those who avoided distress - £2,163 vs £2,484 per month.

For standard-cost borrowers, those experiencing distress had an average current account turnover that was 4% lower than those unaffected in the same group - £1,924 vs £1,998 per month.

So far this may be entirely in-line with expectations – lower income associated with a higher probability of getting into financial difficulty.

But for our other groups this was not true.

On average those who fell into distress in both high-cost borrowers and those in the household bills only group actually had fractionally higher current account turnover than those who did not suffer financial difficulties.

High cost borrowers who fell into distress in fact had average current account turnover of £1,390. The equivalent figure for those who did not fall into distress was about 4% lower at £1,314.

And among those in the household-bills-only group, those who later became financially distressed had an average current account turnover of £1,338 compared to £1,321 for those who avoided financial difficulty.

This last figure is a difference of less than 2%.

Within these two groups it appears that income is not a characteristic that helps distinguish between those who later fall into financial distress and those who do not.

Rising and falling debt

In every group, including mortgage-holders, those who enter distress see their total non-mortgage debts rise in the six months leading up to that moment of distress. Typically, that rising debt comes in the form of increased unsecured borrowing.

Mortgages are different. Most home-loans typically involve regular capital repayment. So even as they become financially stretched, mortgage holders will tend to be paying off capital on their home loan. The research demonstrated clearly that mortgage holders prioritise their home loan. Through thick and thin, they keep paying the mortgage.

Again, this may be as expected, but then there is an intriguing finding. Among the mortgage holder group, those who went into distress had in fact paid off more of their mortgage debt in the previous six months than those who did not go into distress.

Another intriguing finding concerns the use of available credit.

Among those who went into distress, mortgage holders and standard cost borrowers both had substantial fungible unused credit – fungible meaning here credit available for any kind of spending as opposed to credit with a limited range of uses such as store cards.

In other words, they went into financial distress – arrears on debt or bills, a default or perhaps even a County Court Judgement – even though they had access to further borrowing.

While it may be puzzling that borrowers do not exhaust their available credit to avoid going into distress, there are a range of possible explanations.

For some their unused but available credit may simply be insufficient to avoid distress. This could account for those with difficulty meeting mortgage payments.

In other cases, the available credit may be associated with high interest rates and charges likely to lead to greater trouble in the future. In these circumstances borrowers may be choosing not to use this credit for fear of increasing rather than resolving their problems.

A third reason may be that some borrowers choose not to use some available credit because they wish to keep some spare capacity as a precaution against unavoidable future spending shocks.

Other explanations include the possibility that borrowers are simply unaware of unexhausted credit limits or that credit files are only updated with some delay.

Is it about total debt?

As with earnings, the research showed that in most groups there was indeed a correlation between total debts and becoming financially distressed. But again, the pattern was not uniform.

Standard cost borrowers who went into distress had debts 66% higher than those who did not.

High cost borrowers who went into distress had debts almost twice as high as those who did not.

And among the Household bills only group, those who went into distress had debts more than 3 times than those who did not.

So far, so intuitive. But then we come to mortgage-holders.

Among this group, those who went into distress had on average lower debts than those who did not. The average difference was not great with the distressed owning a total of £128,334, 6% less than the non-distressed with average total debts of £136,402.

Even so, it is noteworthy that the mortgage holders group breaks the strong pattern seen in the other groups. A likely explanation is that those who fall into distress in this group were able to borrow less when they first took out their mortgage because they were less creditworthy even at that stage..

Location, Location, Location

As noted in the first of our articles there was a tendency for those who fall into financial distress to be concentrated in urban areas.

Seen through the filter of the borrower clusters an even clearer picture emerges.

Mortgage holders

Mortgage-holders partly reflect the urban pattern for financial distress, with urban conurbations of the West Midlands and the North West clearly standing out. West Wales also stands out for a higher than average rate of distress among mortgage holders. Perhaps surprisingly London, known for its extremely high property costs, does not stand out at all for its proportion of distressed mortgage holders.

Standard-cost borrowers largely match the urban pattern for distress.

High-cost borrowers

High-cost borrowers also reflect the urban pattern, but there is also an above average concentration of high-cost borrowers falling into distress in the East of England and a very strong correlation with Southern Scotland which includes its major urban centres.

The urban bias is again visible among those in the household bills only group who fall into distress, but the slightly higher than average concentrations in areas of southern England and the West Country are also worth noting.

Conclusions… so far

The headline findings from this research have at times confirmed what we might call common sense assumptions.

Those who fall into distress tend to be young; have lower earnings; have high levels of debt; and are using predominantly more expensive forms of borrowing. Distress is also associated with a fall in income.

But when we examine the data through our borrower groups, there are also some notable finding and a few intriguing questions.

  • Mortgage holders break the mould – those who end up in financial difficulty had slightly smaller mortgages on average than other mortgage holders.
  • Among heavy users of high-cost credit, income appears to be of little significance in determining who gets into difficulty and who does not.
  • London does not appear to have a notable problem with mortgage holders entering financial distress.
  • Southern Scotland however has a marked issue with users of high-cost credit suffering financial problems.
  • What do we make of those who end up in financial distress while still having further credit available to them? Are these wise borrowers who know when to stop? Or are they missing a chance to tide themselves over during a rough patch?
  • High-cost borrowers appear to spend longer in distress than other groups. Is this a feature of high-cost lending or is another factor at work and what might be done to help high-cost borrowers recover from distress more swiftly?

The research into the UK’s distressed debtors is ongoing.

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