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Interest rate rise could throw millions into ‘debt peril’

Tahmina Mannan
Written By:
Tahmina Mannan

The number of families in Britain with ‘perilous’ levels of debt could more than double if interest rates rise in the next four years, says a think tank report.

According to the Resolution Foundation, the number of families who are struggling with debt repayments could double to 1.2 million if interest rates rose faster than expected and household income growth remained weak and uneven.

This would result in levels of debt back at the heights last seen in the run up to the financial crisis.

The report followed a ‘worst case’ scenario in which interest rates rise to 3.9% by 2017, (two percentage points higher than current market expectations but still below typical long term levels) and household income growth lags behind GDP.

It identified that some 3.6 million households were spending more than 25% of their disposable income on debt repayments at the end of 2012.

Although this number had fallen since 2008, it appeared high given the historically low level of the Bank of England’s base rate.

The report considered these households to be ‘debt loaded’ – largely keeping up with repayments but vulnerable to future changes in borrowing costs, earnings, house prices and forbearance practices.

But the report suggested that the number of households who are in ‘debt peril’ – those which pay 50% of their income on debt repayments alone – is likely to grow even with the slightest upward tick in the Bank rate.

The Bank of England base rate has been at 0.5% for 52 months, since March 2009.

Comments from the new Bank boss, Mark Carney, hinted that bank rates will not rise in the near future. However, market expectations suggest that the rate may increase to 1.9% by 2017.

Government schemes like Help to Buy and Funding for Lending are also forecast to push consumer debt levels upwards, said the report.

Total household debt is set to rise to £1.8trn by 2018, up from about £1.55trn now.