Never mind the 'suffering savers' - let's focus on keeping borrowers out of problem debt.
Like a stuck record, the Bank of England kept interest rates at 0.5% last week (for the 30th month in a row). It has been suggested that the low rate held since March 2009 has cost savers £43bn. But should we save the indebted first and then worry about savings?
Figures from CCCS reveal that the Bank of England need to maintain the low rate or even cut interest rates further in order to help keep UK citizens out of insolvency. Our figures show that 6.2 million households are currently financially vulnerable and that 2.2 million homeowners are in arrears or struggling to pay their mortgages.
This comes on top of news that some banks are looking at clients’ financial situation and phoning them to question their spending. Customers have reported being called by their bank and brought to book on their spending habits and being told to pay more of their mortgage instead.
Talk of a ‘Great Recession’ is now in the air and economists are even predicting a Japanese-style 10-year economic stagnation. Add in the rising cost of living and you’ll find that lifting the interest rate anytime soon would only add to the woes of a large minority of the British public.
Debt meltdown for millions
While we're also worried about those struggling on a fixed income such as a pension and we’re concerned that savers are not being encouraged to put money away for the future, there is the other side of the coin: that if interest rates rise, it’ll mean a personal debt meltdown for millions.
The average debt we counsel on has gone down over the past few years, from a high of £27,919 in 2005 to £19,338 last year. This is indicative of the restriction on credit/lending and the fact that many people are using the lower interest rates to pay off as much personal debt as they can.
The lower interest rates have also enabled the average family on a variable rate mortgage to reduce their exposure on products such as credit cards and loans, a positive step that we wouldn’t want to see cut short.
Many economists predict that interest rates will finally begin to rise sometime within the next two years; they also predict the rises will be slow and steady and not reach pre-recession highs for many years.
Problem debt
Even a small increase now would have a disastrous effect on those teetering on the edge of falling into problem debt. Six million households is a large proportion of the total UK housing stock – around 20-25%.
The Bank of England must have access to some of these figures, and perhaps they’re holding off on a rise not just because of the average levels of debt, but also due to the general rise in living costs. Returning to an even slightly higher rate it won’t just hit those in debt; everyone will feel it in their pockets.
It could be better to keep rates low as long as possible; surely it makes sense to allow people to repay as much debt as they can, while they can. This way when rates eventually do go up we won’t have a wave of insolvencies that could destabilise the economy even further.
It’s a delicate balance and we don’t envy the policymakers at all.
Eventually the rates will have to go up
The question is, what can those in debt do to prepare for the rise, whenever it does finally come?
The first thing to do is to put together an accurate statement of affairs; this would include a list of all assets and liabilities as well as a realistic income and expenditure budget.
You might want to prepare two statements and base at least one version on what your mortgage payments would be if a rise in interest rates came in. This would help give you an idea of a ‘worst case scenario’ and help you decide whether you would be able to afford your outstanding commitments in the future.
If you find that you wouldn’t be able to manage it, it might be wise to take some free and impartial advice now (rather than waiting for the bank to ring and tell you off!).
We might not be able to predict when interest rates will rise (if they do) but we’re here to provide help for your financial future if you’re going to struggle.
If you have problem debt we at the CCCS have a free, impartial and confidential online counselling service called Debt Remedy. If you’re in trouble, whatever your financial interest, it’ll offer a solution.