Household debt levels to surge if rates rise – IVA Advice

A recent study has shown that any rises in interest rates could mean the average family spending half of their income on debt repayments, says debt management company A study from thinktank Resolution Foundation suggests that if interest rates rise according to current predictions by 2017, over 800,000 households will see their income heavily squeezed by increasing debt payments, a figure which could rise dramatically if interest rates spiral away from expectations.

The study analysed the effect that rising interests rates would have on household incomes according to several different scenarios, including a best case where the interest rates rise by the predicted rate of 1.9% by 2017, but also a worst-case where the rates rise by a massive 3.9%.

Even if the rates rise by 1.9% and household income grows in line with this, around 700,000 households will end up paying 50% of their take home pay on debt repayments. The situation is even worse if family household incomes stay weak don’t grow – a 1.9% rate rise would pull 810,000 households into the 50% debt repayment bracket. However, both of these figures are based on interest rates rising as predicted. If it increased to the worst-case scenario figure of 3.9% more than 1.2m households would be pulled in.

Matthew Whittaker, senior economist at the Resolution Foundation, 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.

“With no one able to predict with confidence where interest rates will be in 2017, these are sobering findings.”

Around 2% or 600,000 of the UK’s household are currently spending half of their take home pay on debt payments, which is 270,000 lower than at the start of the recession and due to the lowest interest rates since records began. Any rises over the next four years similar to those predicted would see those levels rise back to pre-recession levels.

A spokesperson for debt management company said: “Everyone is expecting the interest rates to rise at some point over the next few years, in fact a rate rise has been expected for some time. For those people who are burdened with debt this is a very worrying time and any rise in interest rates could push them over the edge. Awards of IVAs have decreased over the last few months, prompting speculation that the recession is over. Interest rate rises will push those at the bottom of the income ladder and in debt further towards personal insolvency, and we are expecting cases of IVAs to rise a few months on from any rate rises.”

Mr Whittaker believes that not enough is being done to tackle the problem now before it becomes insurmountable. “Policymakers and lenders need to use the current period of record low rates to defuse debt problems rather than storing them up for the future. Soaring levels of problem debt repayments could well become one of the major policy challenges of the next parliament – and one there’s been almost no discussion about.”