Another twist of the knife for a nation in the red
Debt-advice charities fear last week's rate rise will leave even more Britons in desperate straits
Sunday 14 January 2007
"It only takes a small rise in interest rates to tip another few thousand over the edge."
Even if only half accurate, this gloomy forecast from Rosalind Pearson of the debt-advice charity Citizens Advice, made shortly before last Thursday's surprise base-rate rise to 5.25 per cent, will resonate with many people this weekend.
While an increase in rates won't affect homeowners with a fixed-rate mortgage, it will hit those millions on a variable deal, including tracker loans and standard variable rates (SVRs).
The extra £17 a month that the latest rate rise will add to repayments on a £100,000 mortgage charged at an average SVR of 6.8 per cent doesn't sound like a catalyst for collapse. But this is the third hike in the base rate in less than six months - from 4.5 per cent in August to 5.25 per cent today. Many households will have felt this cumulative impact not just on home-loan repayments but also on credit card bills in the shape of higher annual percentage rates (APRs).
The rate rise will likely hit remortgages and new personal loans, too. The price-comparison website uSwitch.com last month predicted the end of the "sub-6 per cent" personal loan.
For Britons relying on cheap credit to consolidate expensive debts, pay off the bill for Christmas, plan this year's family holiday or just make ends meet, the increase in the cost of borrowing will be another blow to their personal finances.
Debt-advice charities such as Citizens Advice and the Consumer Credit Counselling Service (CCCS) report an alarming increase in the number of people contacting them.
"Since 2 January, we've received more than 1,000 calls a day to our helplines," says Frances Walker of the CCCS. "Between July and September last year, our most up-to-date figures, the average debt for our clients was £31,000 - an increase of more than £2,200 on 2005."
Over at Citizens Advice, staff estimate that they currently receive 5,000 new debt-related cases every week. "It's increasing all the time," says Ms Pearson. "Last year, there were 1.4 million debt cases in the UK."
Many callers to both organisations have reached a point where mis-management of their finances threatens to engulf their lives. Such indebtedness afflicts all social strata, from overstretched low-income families, to students, to overreaching high earners who invest in buy-to-let properties.
A string of missed repay-ments on mortgages, credit cards, overdrafts or personal loans can lead to spiralling debt; for many, the threat of losing their home is real.
There is much evidence from recent surveys underlining the scale of the problem. In its Housing and Mortgage Market forecasts for 2007-08, the Council of Mortgage Lenders warns that home loan "arrears ... are likely to start rising again [after a fall last year] in 2007 following the recent rises in interest rates".
An estimated 105,000 borrowers in the UK were in arrears of more than three months on their mortgage in 2006; the predicted figure for 2007 is 130,000.
Property repossessions this year are expected to stay the same, at around 15,000.
But it's not just mortgage repayments that are causing concern. A survey from the CBI business group last week revealed that many of its members expect the number of borrowers in arrears on their personal loans to carry on rising.
As for credit cards, Bank of England figures show that £738m of debt was written off between July and September last year - up from £628m in the same period in 2005.
Research by accountants and financial advisers Grant Thornton suggests that there will be 30,000 personal insolvencies by the end of March - a third of these down to excessive Christmas spending.
In the three months to the end of September last year, the Government's Insolvency Service reported 27,644 people in the UK either bankrupt or under an individual voluntary arrangement (or IVA, a separate plan that lets borrowers write off up to 60 per cent of their debt). This was more than 50 per cent up on the figure for 2005.
The reasons why so many Britons are getting into debt are hard to pin down. Banks - which had to write off an estimated £1.37bn in bad debts last year - blame the rise of unregulated firms that encourage indebted consumers to take out IVAs.
Consumer rights groups such as Which? put it down to greedy banks and lax rules governing who they can lend to. Nor, say many financial advisers, should individuals' own responsibility for their problems be overlooked.
But there is evidence that the financial services sector itself is a contributor to the problem. The Financial Services Authority, the industry regulator, revealed last week that many people are at risk of being given "unsuitable" advice by mortgage advisers. This can lead them to take on too much debt.
The following guidelines should prove useful for anyone who is finding it difficult to meet their financial commitments, or who is concerned that they could be stepping outside their personal financial comfort zone.
* Always let your creditors know as soon as you start having problems; you would be surprised at how flexible many will be.
* Don't pay for any advice about resolving your debts. Both the CCCS and Citizens Advice will help you work out repayment plans free of charge, and show you how to manage your money better in the future.
* Think carefully before consolidating all your outstanding debts into one large loan. If the period over which you will be paying this back is excessively long, it is likely that the total interest paid will be well over the odds; this is often the trade-off for giving you easier repayments in the short term. And if you secure all your debts against your home, you could lose it.
* Always pay essential bills first: for most people, these will be their mortgage or rent, council tax and heating. Lose control of these, and you'll slide further down the slope.
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