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Unsecured borrowing fell during the last six months of 2006, a new study reports.

Figures released by Alliance & Leicester claim that Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%). By contrast households without mortgages to pay have continued to take out loans and use their credit cards – although at a much slower pace than in the past – on average increasing their unsecured debt by £98.

In addition, the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994.

Alliance & Leicester believe that base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when on average homeowners spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.

Spokesperson Chris Rhodes said: “We have entered 2007 with a reduced appetite for borrowing and house buying since last summer. Our latest survey suggests that another base rate rise could cool the housing market further.”

The study also reported that consumers have witnessed an increase in their income, while interest rates on credit cards and loans have fallen.

Mr Rhodes adds: “Consumers have shown an unprecedented appetite to reduce their unsecured borrowing, while their incomes have continued to grow and interest costs on their unsecured borrowings have fallen. This will have taken some of the sting out of the latest increase in base rates.”

It is fair to say that as rate increases continue, unsecured borrowing will become more difficult to manage for some borrowers, and for those with home equity available, a switch from unsecured to secured borrowing becomes a viable mechanism to maintain affordability.

Mr Rhodes continue: “With the average mortgage borrower having well over £100,000 of equity in their homes, many of those who remortgaged will have taken the opportunity to pay down some of their unsecured borrowings – this may partly explain the decline we have seen in their personal borrowing and credit card balances.”

Here at loan-sense we tend to agree with Mr Rhodes on this point, although there can be many cases where borrowers may have a fixed or capped mortgage in place at a rate that’s better than anything available in the market, or they may have experienced some adverse credit since taking out their current mortgage, again barring them from re-mortgaging at a rate as competetive as their existing deal. In these circumstances, a remortgage to refinance unsecured debt is less attractive and would probably constitute bad advice, however the opportunity still exists for borrowers in these circumstances to utilise their home equity to reduce the cost of their unsecured borrowing by converting it to a loan secured by a 2nd charge on their home.

The first step to reducing your outgoings by this method is to request a free no-obligation quote from The Loan Helper. The Loan Helper has access to hundreds of deals from a panel of 16 top lenders and will be able to find you the very best deal for your own individual circumstances.