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The real costs of interest rate hikes

A new report has unearthed consequences of faster than expected interest rate rises, amid the rapid increase of consumer credit.


Amber-Ainsley   Pritchard

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Amber-Ainsley   Pritchard
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Think tank Resolution Foundation has published An Unhealthy Interest? which looks at how different consumers will cope if they faced more pressure on income.

 

It said the cost of servicing Britain’s household debt (£1.9trn) is low by historical standards, with repayments currently accounting for nearly eight percent of disposable income – well below the 12 percent recorded just before the financial crisis.

 

However, the report found a significant number of households have high debt burdens –  households headed by someone aged 25 to 34 spent nearly £1 in every £5 of their pre-tax income on debt repayments in 2017, compared to 20p for households aged 65 and over.

 

The foundation said many households display signs of debt distress, with around three in 10 working age households showing at least one sign of this. Of these households, 21 percent had difficulty paying for their accommodation and 17 percent found unsecured debt repayments a heavy burden.

 

The proportion of households in some form of debt distress rises to almost half (45 percent) among the poorest fifth of working age households

 

More than a third of this group have experienced difficulty in paying for accommodation and one in six are in arrears on either their mortgage or consumer debts.

 

The report said that overall UK households are well prepared for a new era of slow, measured interest rate rises. But the scale of the enduring debt overhang would make any return to pre-crisis interest rate levels catastrophic, taking debt servicing costs to levels above those seen before the financial crisis.

 

Matt Whittaker, chief economist at the Resolution Foundation, said: “While the evidence shows that on the whole Britain is well prepared for future interest rate rises, policy makers must have regard for those low-income households who are already struggling to pay off their debts, and who could be really exposed if interest rates go up faster than currently expected.”

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