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|Britons owe more, pay less in interest. Will it last?|
|Wednesday, 18 January 2017|
Each Briton is spending, on average, £1001 a year on debt interest repayments, 3.79% of average earnings. Between us, that’s more than £50 billion at an annual rate.
That might sound like a lot but it’s actually at the lowest figure we’ve seen since 2003. Debt might have grown to a record 12 month* average of nearly £1.5 trillion in 2016, but the massive falls in interest rates in 2008 and 2009 mean that we are actually paying much less in interest than we did before the credit crisis.
With the Bank of England predicting interest rate rises this year, we thought we would take a look at what would have happened if rates had not been slashed from 5% to 0.5% over the winter of 2008/09.
In November 2016, the average mortgage interest was 2.68%, people were paying 10.21% on credit cards and 6.7% on other loans. In April 2008 when the Bank of England set rates at 5%, average mortgage rates were more than double that at 5.8%, credit cards 12.16% and 8.39% was paid on other loans.
So even though we then owed more than £110bn less than now, Britons were paying around £86 billion in interest, 65% more than the £52bn we paid in 2016. This massive figure is why the Office for Budget Responsibility calculates that ‘household debt servicing costs’ rose above 10% of disposable income in 2008, but has fallen to closer to 5% in recent years.
If rates had not changed at all since then, we would be paying 81% more than we pay today – that’s £94bn, £1,810 for every adult in the UK or 7% of average earnings.
Historically, a 5% Bank of England rate is not high, and it is easy to imagine that if prices start rising this year, we will see significant rises. For most of us, our debts might feel manageable now, but if we have to spend one in every 14 pounds we earn simply paying lenders interest, it’s a massive issue we’re going to have to prepare for.
Michelle Highman, Chief Executive of The Money Charity says: “We track these statistics every month for our Money Statistics, and when private debt topped £1.5 trillion a couple of months ago, one of the things that jumped out at us is how unnoticed this figure is, and how little we are talking about how we’re going to plan for the serious problems it could cause. After all, it’s nearly as much as the government owes.
Part of the answer must be that we are actually paying less to service bigger debts due to historically low interest rates – so people are not feeling the pinch in the way they might. But what we know is that near-zero Bank of England rates are not normal, and soon the bigger debt could well mean bigger repayments too!
“It’s likely things are going to change and it won’t be as easy to make payments on your mortgage or loans. But remember that there’s help available at an early stage if you’re in difficulty. If your debt feels too much to deal with, there’s free, impartial advice available from organisations like StepChange and National Debtline.”
Other key points from January’s Money Statistics include:
Nationwide estimate that house prices rose by 0.8% during December 2016, and were up 4.5% on 12 months ago.
According to the Financial Conduct Authority, at the end of Q2 2016 there were 218,279 mortgage loan accounts with arrears of more than 1.5% of the current loan balance.
This is 5% up on the previous quarter.
The Pensions Regulator estimates that at least 7,050 million employees had joined a pension scheme under auto-enrolment by the end of November 2016.
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