Debt fears as interest rates rise again

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The Independent Online

Interest rates rose for the fifth time in less than a year today - by 0.25 per cent to 4.75 per cent - sparking fears that increasing numbers of people will struggle to keep up with their debts.

Interest rates rose for the fifth time in less than a year today - by 0.25 per cent to 4.75 per cent - sparking fears that increasing numbers of people will struggle to keep up with their debts.

The amount people have borrowed has boomed during the past few years, fuelled by low interest rates and high employment.

The Bank of England released figures last week showing Britons now collectively owe £1.004 trillion through mortgages, loans, hire purchase agreements and credit and store cards.

With interest rates expected to end the year at 5 per cent consumer groups and MPs have expressed concerns that people have taken on unmanageable levels of debt.

Vince Cable, Liberal Democrat Treasury spokesman, said: "Last week the Bank of England announced that we were £1 trillion in debt, with 80 per cent of this debt secured on dwellings.

"If interest rates continue to rise to 5.25 per cent to 5.5 per cent next year, as expected, or house prices fall, many may find themselves in serious difficulty."

A single interest rate hike will have little impact on people's ability to afford their monthly mortgage repayments.

Someone with an average £65,000 mortgage will see their payments rise by just over £10 a month, while a first-time buyer who is more likely to have a loan of around £100,000 will have to find an extra £15.

But homeowners have now seen cumulative rises of £50 a month on a £65,000 mortgage since November last year, while those who are heavily mortgaged with a £200,000 loan are facing cumulative increases of more than £150 a month.

Government figures recently showed that there had been a 13 per cent rise in the number of repossession orders made in England and Wales during the three months to the end of June, although the level is still low by historical standards.

The impact of rising interest rates on personal loans and credit cards will be less dramatic, as most loan rates are fixed and credit card rates tend to respond to competition, rather than rises or falls in the cost of borrowing.

However, it is likely to mean people looking to take out a loan to consolidate their debt will have to pay more after today.

The National Consumer Council has warned that around six million families are already struggling to keep up with credit repayments, while Citizens Advice said it had seen a 44 per cent increase in the number of people coming to it for help with debt in the past six years.

But economists played down the likely impact of today's rate rise on people's ability to keep up with their debts.

John Butler, an economist at HSBC, said: "Debt servicing costs will rise but the cost of servicing debt is still relatively low.

"I think interest rates would have to go back to around 5.5 per cent to take the debt servicing burden back to where it was in 1990. It (today's rise) shouldn't cause the consumer or housing market to suddenly collapse."

And Martin Ellis, Halifax chief economist, said: "It is not going to cause any widespread problems. There will always be people at the margins who it will affect, but interest rates, although they have gone up, remain low."

He said mortgage repayments currently took up around 17 per cent of people's total pay, compared with more than 30 per cent in the late 1990s.

Malcolm Hurlston, chairman of the Consumer Credit Counselling Service, said: "Interest rates main low and people are coping with their debts.

"People are coming for help sooner and the interest rate rise should increase that, but we do not think in itself that is a significant factor."

He added that he did not think there had been an overall increase in people getting into problems as interest rates were still low by historic standards and employment remained high.