Where is the 'ostrich generation' going to find theextra money just to get by?
Saturday 04 June 2011
Hear that? It's the sound of distant but increasingly insistent alarm bells set off by the latest round of money stats. First is the news that despite years of a record low base rate, 300,000 of us have switched to interest-only mortgages since the beginning of the credit crunch. Second is that the Council of Mortgage Lenders (CML) has predicted repossessions will increase from 40,000 this year to 45,000 in 2012. And finally there's the fact that £179m is currently paid every day in personal debt interest according to money education charity Credit Action. You can see where I'm going with this.
We all know the base rate is on its way up and right now interest rate futures are plumping for a March 2012 increase of 0.25 percentage points followed by another later in the year or in early 2013.
It doesn't sound like much, but if, as the British Bankers' Association suggests, the average outstanding mortgage is £145,000, typical homeowners may need to find an extra £362.5 a year just to tread water on their debts for each 0.25 percentage point rise. With the expected 0.50 percentage point rise by the end of next year, that's, calculated crudely, another £725.
This still may not sound like all that much but don't forget that household bills, currently an average of £23,660, are increasing by 4.5 per cent a year or £1064.70, according to the Office for National Statistics. And just to throw one more figure in here to really drive home the point, the average owed by every UK adult is £29,835 – 121 per cent of average annual earnings – with few of us expecting a wage rise any time soon. Yes, my calculations are a wee bit simplistic, but my question is: where will you find an extra £1,789.70 by the end of next year to simply maintain the status quo?
Hopefully I'm just being a little melodramatic, and Joanna Parsley, associate director at Credit Action, says people shouldn't necessarily panic. "The widely predicted rate rise will certainly impact on mortgage holders who have been enjoying low rates of interest for many months now," she says. "But food and energy prices are going up and as people need to find more money to pay mortgages it could mean they pay off other debts at a lower rate. People need to be sure they are managing their money, communicating with their lender as soon as they have any problems."
Speaking of taking responsibility for our money, plenty of TV snippets make my jaw drop, but no episode of Monsters Inside Me has had the same effect as one advert that seemed to suggest engaged couples should take their expensive, short-term loan to pay for the picture perfect wedding.
I sat blustering self-importantly on the sofa over the irresponsible nature of said advert for some time before a besieged other half suggested that most people should be able to see the rate emblazoned in the medium-sized print at the bottom of the screen and have the presence of mind to steer clear.
Ooh, that's dangerous ground. You only have look at the latest action by the Office of Fair Trading to close down dishonest brokers charging upfront fees for a loan they have no intention of delivering to see that there are many sloping playing fields out there as we try to pick our way through the bewildering world of financial services.
Simplification, transparency and above all "treating customers fairly" have been key themes for the financial services industry for years now. These campaigns have made a huge difference to the way we are informed and I'm a big fan.
But does it detract from the constant drive to make us more engaged, informed and pro-active about our money if the default assumption is that we don't have the presence of mind to read the small print?
Somehow, the news that mine has been dubbed the ostrich generation – the group that assumes it'll all be fine and someone else will sort it out – doesn't come as much of a surprise.
Simon Read is away
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