Financial News

  • 12 July 2013, 6:51

Debt Warning For Mortgage Payers Over Rates

Millions of people are at risk of entering a spiral of debt over mortgage interest rates, according to new research.

The study published by the Resolution Foundation think tank analysed the effects on families if interest rates rise by the expected 1.9% in four years.

It also considered the "adverse but plausible" scenario that they could increase by a further 2% by 2017.

It calculated that more than 800,000 families will be forced to spend half of their income on debt repayments by 2017 if interest rates rise by current predictions and household income is squeezed.

It found Britain could be left in a fragile position with a major surge in families with dangerous debt levels.

A "best case scenario" where interest rates rise by current expectations and family household income growth is strong will see 700,000 households spending more than 50% of their income on repayments.

But if household growth is weak and uneven, the figure increases to 810,000.

It further rises to 1.2 million if interest rates exceed expectations and reach 3.9% by 2017.

Resolution Foundation senior economist Matthew Whittaker said: "There is now the real prospect that a large number of households already burdened with debt could collapse under its weight if economic conditions tighten.

"Even if interest rates stay in line with expectations, we are likely to see a rise in the number of families struggling with heavy levels of repayment over the coming years.

"But if the squeeze on household incomes continues, Britain could be left in a fragile position, with even moderate additional increases in interest rates leading to a major surge in families with dangerous debt levels - especially among worse-off households.

Since 2007 the number of households spending at least 50% of their income on repayments has dropped by 270,000 to 600,000 because of falling interest rates.

But a rise in interest rates in the next four years could see Britain return to higher levels of household debt than before the financial crisis, which was sparked by US homeowners being unable to service their mortgage debt.

Meanwhile, according to the Office for National Statistics, Britain is now a more unequal country than at any point since 1986.

It said benefits and tax credits have helped protect the incomes of the poorest amid ongoing wage stagnation.