EVEN in a ‘good growth’ scenario, the number of UK households facing a debt crisis would almost double, warns the Resolution Foundation think-tank.
It said yesterday that millions of UK households will face ‘perilous’ levels of debt when interest rates begin to rise.
In its latest report, the foundation, which focuses on living standards, says the number of people in ‘debt peril’ – using more than half their disposable income to repay debt – could rise from 600,000 to 1.1 million by 2018 if interest rates rise to three per cent.
If rates hit five per cent, two million households would be in ‘debt peril’, it warns.
The Resolution Foundation study used the latest five-year growth projections from the independent Office for Budget Responsibility.
The predictions apply to all debt, including credit cards and other loans, but mortgages make up the largest slice of most debt in the UK.
The Bank of England has kept interest rates on hold at a record low of 0.5 per cent since March 2009.
Under the Bank’s policy of forward guidance, brought in by Governor Mark Carney, it has said it will not increase interest rates until the rate of unemployment has dropped below seven per cent.
The official UK unemployment rate this month recently fell to 7.4 per cent during the three months to October, the lowest level since early 2009, which led some economists to predict that the Bank may raise rates as soon as next year.
The Resolution Foundation report warns that ‘for the Bank the dilemma is clear: how to keep the cost of borrowing low long enough that the recovery is not choked off before it really gets underway, while simultaneously sticking with its mandate to keep a lid on inflation and ensure economic stability.’
It stresses: ‘Millions of borrowers remain vulnerable … when interest rates start to rise, millions of British households will still be servicing very high levels of debt … not all households have been able to take advantage of the breathing space afforded by low borrowing costs.
‘The averages also mask large parts of the population where debt repayment-to-income ratios remain far higher.’
It says is has ‘identified some 3.6 million “debt loaded” households, spending more than one-quarter of their income on repayments’ and that figure ‘would include a significant number of “at risk” households who are vulnerable to future interest rate rises, along with changes in earnings, house prices and forbearance practices.’
In the event of a rates hike to five per cent: ‘The human and social cost of that would be huge …
‘Britain’s economy remains markedly dependent on the spending power of the domestic consumer, who still accounts for around two-thirds of GDP.
‘If a rise in the cost of borrowing leaves many struggling under the burden of debt, it will put both financial stability, and the sustainability of the recovery itself, at risk.’
