Julian Knight: Be sure not to miss out on the chance of a lifetime
British consumers are in many instances no better off - all we have been doing is kicking the debt down the road
Saturday 23 November 2013
It was the opportunity of a lifetime. Interest rates at 0.5 per cent – at a cost of more than £100bn to savers – represented the biggest get out of jail free card for Britain's army of debtors ever, and what did we do with the money?
Not much it seems, judging by the latest figures on debt issued by the Centre for Policy Justice last week.
British consumers are in many instances no better off or even in a slightly worse financial position than they were at the time of the credit crunch.
This is in sharp contrast to the United States – which had an even bigger debt bubble to deflate – where many borrowers have chosen to use low rates to pay back their borrowing or even go bust and start again.
In fact, collectively we owe 50 per cent more in loan, credit cards and mortgages than we did eight years ago. And when you factor in the fact that the debt of the British state has more than doubled in that same time, we really are in a horrendous mess.
Of course, debt is always relative to assets, we may owe £1.4trn in mortgages but the combined value of the UK's housing stock is in excess of £4trn, that is a loan to value of a comfortable 35 per cent.
However, in a fire-sale situation as happens during recessions and periodic property price corrections, the value of the combined housing stock can drop through the floor – Ireland is a good example of where that has happened.
The size of the UK economy and past reputation of its government finances has helped give us a breathing space that Ireland hasn't enjoyed, but what have we done with it? As I say, not much.
However, it is not too late. Interest rates by my reckoning will remain at this very low level – barring an international shock such as a break up of the eurozone – for the next couple of years, and the reason it will is because still not enough of us have reduced our debts.
This gives anyone with a major credit card, loan or mortgage debt an opportunity to repay what they owe at fabulously low rates. If you do that then when rates rise as they surely will – and perhaps not in as staged a way as the Bank of England hopes (international investors will eventually cotton onto the fact that we aren't paying our debts back) – then you should be able to cope.
My greatest fear is that all we have been doing is kicking the debt can down the road since 2007 and we will have to face up to the huge sums we have borrowed against a backdrop of rising interest rates and impatient international markets. That could be very messy and this time the government won't be able to intervene as happened with such measures as mortgage support schemes in 2008.
The best advice is to use the likelihood of rising wages, better employment prospects and very low interest rates to get your finances on a sure footing, otherwise you may well live to regret missing out on this opportunity of a lifetime.
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