Financial News

  • 25 July 2014, 5:28

Deep Debt Warning Issued As Rate Rise Looms

The number of households creaking with crippling debts may double over the next four years, a think-tank has warned.

The Resolution Foundation forecast of 1.1 million in the most severe 'debt peril' by 2018 was released alongside advice that consumers should prepare themselves for rising interest rates.

The organisation said increased borrowing costs - combined with poor wage growth - risked plunging more families into hardship with even a "relatively benign" move away from the current bank rate of 0.5% leaving them with repayment problems.

It feared the number of households in "debtperil" - those spending more than half their income on all forms of debt repayments - rising from 600,000 currently to above one million by 2018.

Its projections suggest the number of "highly geared" mortgage holders who are spending more than one third of their income on repayments could balloon from 1.1 million currently to 2.3 million - equating to around one infour households with a mortgage.

Both scenarios are based on assumptions that the Bank of England's base rate, which has been at the historic 0.5% low for over five years, will approach 3% by 2018.

Its governor, Mark Carney, has suggested the timing of any rise is likely to be linked to improved news on wage growth but a 0.25% increase could happen as early as late 2014.

The report said the country needed "shaking from its complacency" and lenders should be upping efforts to identify and help people who would be put at risk by a rise in interest rates, including those not currently in arrears.

It urged the Financial Conduct Authority (FCA) to force lenders to contact aroundtwo million mortgage holders who are the most vulnerable to interest rate rises and conduct a 'financial MOT' with such clients.

This initiative would be similar to that involving home owners on interest-only mortgages who have been contacted by lenders amid fears many do not have enough money put aside to pay back their loan when it ends.

Toughened mortgage lending rules are also now in force to help ensure people can afford their deals.

Another suggestion by the Foundation was that the Government set up a "help not to be repossessed" scheme,enabling borrowers who find their mortgages have become unaffordable to switch to a shared ownership scheme.

Matthew Whittaker, chief economist at the Resolution Foundation, said: "It would be a serious mistake to think that the legacy ofproblem debt built up in the pre-crisis years will simply evaporate with a return to economic growth.

"The magnitude of the stock of debt is simply too large, given expectations that income growth will be gradual at best.

"And while the mortgage market largely remains competitive, tighter lending criteria means that some highly-stretched borrowers face limited choices."

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