‘Debt peril’ awaits 1.25m UK households if rates rise

Last updated: July 11, 2013 10:15 pm

‘Debt peril’ awaits 1.25m UK households if rates rise

By Claire Jones, Economics Reporter

Up to 650,000 more UK households face “debt peril” if mortgage rates rise unexpectedly before the economy returns to full strength, a think-tank warns.

The Resolution Foundation said on Thursday that 1.25m households would have to spend half their disposable income on repayments by 2017 if the Bank of England’s official rate rose 2 percentage points higher than forecast without a recovery in wage growth.While more people between 35 and 50 borrowed heavily than other age group, a surprise rise in mortgage rates would hit younger borrowers disproportionately, according to the research. Families with children were more at risk from “debt peril” than childless couples and single adults. The poor were also more vulnerable – 7 per cent of the poorest fifth of households would see more than half their income eaten up by debt repayments if rates rose unexpectedly, compared with 3 per cent of the richest fifth.

The study highlights the threat to recovery posed by UK households’ high debt burden, accumulated during the boom years.

At the height of the boom in 2007, 870,000 households faced repayments that were equivalent to half their income or more. The number of households in “debt peril” fell almost a third between 2007 and 2011, as official rates plunged from 5.5 per cent to their current record low of 0.5 per cent.

But, while mortgage default rates have been far lower here than in the US, Britons have proven less willing than their American counterparts to take advantage of low rates to repay loans. The UK’s fiscal watchdog, the Office for Budget Responsibility, projects the total household debt burden to rise in the years ahead to 151 per cent of income by 2018.

Matthew Whittaker, an economist at the Resolution Foundation, said: “It is not clear that we are doing enough while we have breathing space.”

The publication of the research coincides with dramatic movements in yields on US Treasuries amid signs that the Federal Reserve could soon slow the pace of its bond buying. The movements, which have pushed up borrowing costs in the UK, led Mark Carney, the BoE’s new governor, and the rest of the Monetary Policy Committee to rip up its rule book on central bank communications last week and warn that rises in market interest rates were “not warranted”.

The bank launched an inquiry last week into the vulnerability of borrowers and financial institutions to a sharp rise in long-term interest rates.

But at a panel to mark the launch, David Miles, a member of the MPC, said a rise in the number of households facing “debt peril” did not present a serious threat to the economy.

While the MPC was “very aware” of the problems raised by the research, Mr Miles queried the likelihood that rates would rise before the economy, and wages, picked up. Mr Miles said: “Is that really a plausible combination of events?” He said it was “highly plausible” that rises in mortgage rates would lag behind any tightening of monetary policy.

Kate Barker, a former monetary policy maker, said: “These are not numbers to be alarmed about . . . From a macro point of view, this is manageable: from a micro point of view, it will be difficult.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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