The soaring values of homes in the region have tempted many homeowners to borrow more money than before. But, will you be in trouble when the bubble bursts? STEPHEN LEWIS and NICKY BURRIDGE investigate the debt timebomb...

HOMEOWNERS on low and middle incomes could be sitting on a debt timebomb if the economy worsens, a charity warned this week.

The Consumer Credit Counselling Service (CCCS) said the low cost of borrowing, low unemployment and rising house prices have encouraged borrowers to take on more debt.

But it warned that, if there was a downturn in the economy as a result of the current uncertainty and a steep rise in unemployment, many people could find themselves unable to meet repayments.

Research carried out by the group found that homeowners tend to have higher levels of debt than those who rented accommodation, owing an average of £22,928 excluding their mortgage, compared with £13,432 for those who rented.

The CCCS said people who had recently bought a property may have overstretched themselves with all the associated costs of moving and setting up home, leaving those earning £1,500 a month or less particularly vulnerable to a change in circumstances, such as losing their job.

The group said that homeowners might be tempted to borrow more because rising house prices make them feel more wealthy, though in reality their money is tied up in property and may not be sufficiently liquid to cover other debts if they lose their job.

The warning was echoed today by leading York financial consultant Gerry Gray, of Grosvenor Financial Services.

Mr Gray said those already struggling to service their debts could be hit by a series of financial changes, including the 1p hike in National Insurance which comes in on April 1, being asked to pay more into their company pension scheme, and the real possibility that house prices could level out or even begin to fall.

Others could find themselves out of work altogether as companies respond to the difficult economic situation by reducing staff levels, he said.

The CCCS, which analysed the profiles of more than 50,000 people coming to it for help between January 1998 and June 2002, said the average debt level had risen from £12,000 to more than £18,000 during that time.

The majority of people with debt problems are aged between 25 and 39, with slightly more women than men applying for help, although men have larger debts, averaging £18,000 compared with women's £13,000.

CCCS chairman Malcolm Hurlston said: "The profile of the typical CCCS client has changed little over the past four years: they are borrowing from the same number of creditors and being lent the same income multiples. In effect, neither lenders nor borrowers have become any more reckless.

"However, despite this, the actual amount people owe has increased as lower borrowing costs, rising wages, low unemployment and rising house prices have encouraged borrowers to take on more debt, leaving them exposed to any downturn in the economy.

"If unemployment were suddenly to increase, it is likely that a lot of people would be caught out."

It is not all bad news, however. Mr Gray said it was likely that the Bank of England would cut interest rates again this year - possibly by as much as half a per cent.

But he said some serious belt tightening would still be needed if those on lower incomes or with large debts were not to find themselves in difficulties.

"I am considerably worried about the state of the economy," he said. "People need to be looking at what savings they can make on their household budget. There are lots of ways they can reduce outgoings.

"Are they paying too much for their electricity and gas? A change of supplier could mean a reduced bill. Do they need to think about re-mortgaging their house, to take advantage of the special offers from mortgage companies for new customers?

"You need to look at your overall situation. Savings have never been so important. For example, are you maximising your cash ISA allowance (£3,000 a year)?"

If you can trim some money off your household bills and outgoings, he said, it would be a good idea to start paying off some of your debts now - rather than waiting until the hard times really begin to bite.

Updated: 10:46 Thursday, March 20, 2003