Risk of debt peril’ when interest rates rise

By on July 24th, 2014


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A “relatively benign” rise in interest rates still has the potential to double the number of households facing debt problems, a think tank has said.

A report by the Resolution Foundation said the UK had failed to deal with a “debt overhang”, leaving the economy vulnerable to rate rises.

It predicted that by 2018, 1.1 million households could be in “debt peril”, compared with 600,000 now.

This means more than half of their post-tax income goes on repaying debt.

It also suggested that households spending more than one third of their income on mortgage repayments could rise from 1.1 million to 2.3 million by 2018, equating to about one in four households with a mortgage.

Recovery requirement
The Money Advice Service has claimed that 8.8 million adults have too much debt. However, it claimed that one third of them managed to make repayments and so went under the radar.

The Resolution Foundation, which campaigns to improve living standards of those on low and middle incomes, recommended that the Bank of England resisted Bank rate rises until there was clear evidence of a sustainable, broad-based recovery.

It also said that households should be given the opportunity to lock into low rate mortgages for a set period in the future, and that there should be debt advice and support for those forced to sell their home or who have their property repossessed.

Minutes of the Bank’s Monetary Policy Committee, published on Wednesday, revealed that the committee’s nine members voted to keep rates at 0.5%.

Bank of England officials are still concerned by the UK economy’s weakness despite pressure from some business leaders to start raising rates.