Debt troubles hit high earners, as motor finance delinquencies reach three year-high and mortgage pressures mount

Climbing interest rates are pushing more and more high earners into debt troubles, according to the latest Market Pulse from credit reference agency Equifax, which points to a sharp increase in the number of people seeking help to settle debts. People earning more than £4,000 a month accounted for just under 1% of those entering Individual Voluntary Arrangements (IVA) in May 2019, but this has jumped above 3% in September 2022, as delinquency rates rise and mortgage pressures mount. The figures are a reminder that high income alone is no guarantee against problem debt.

The automotive industry has long been a bellwether of consumer demand and economic health, and the motor finance industry is similarly a useful barometer of household financial difficulty up and down the income scale. Equifax’s research reveals that delinquency rates, the number people falling into arrears or default on their motor finance repayments, have risen almost 30% since 2019 to reach a three-year high in October this year.

Jayadeep Nair​, Chief Product & Marketing Officer, ​Equifax UK said: “Delinquency rates are ticking up across most of the credit industry, but the motor finance sector has seen a sharp uplift in people failing to repay. In many ways this is not surprising; the debt-to-income ratio has grown markedly in recent years. Since 2009, the average amount borrowed for a new or used car increased by 100% and 87% respectively, while average weekly earnings increased by only a third, from £429 to £607.”

Dramatic cost increases for energy and food caught many off-guard in 2022, but the resulting changes to interest rates, which are expected to hit 3.5% this Thursday, mean millions of households will face further pressure from the rising cost of servicing debt. The worst is yet to come for many high-income households, especially those with high loan-to-value (LTV) mortgages. One in 10 (10%) fixed rate mortgages are due to expire in the next six months, with average monthly repayments expected to rise more than £400 for millions of households.

Andrew Goodwin​, Chief UK Economist, ​Oxford Economics​ added: “The last year has proven to be a particular challenging one for UK consumers, with soaring energy costs and increasing interest rates, most people will be feeling significantly worse off than they were at the same point last year.

“We’re likely to see inflation settle around the 11% mark for the next few months with a slow decline to 4% by the end of next year. Fixed rate borrowers coming to the end of their terms in the next year will need to brace for significant increases to mortgage costs. This is a profound change from the post-global financial crisis period and will leave many with tough decisions.”

Jayadeep Nair​, Chief Product & Marketing Officer, ​Equifax UK added: “There are undoubtably tough decisions ahead for both consumers and the credit industry, as we continue to adapt to a quickly changing economic environment. Rising interest rates will remain a concern for borrowers, especially as many on fixed rate mortgages brace themselves for significant rises in monthly spending in the next 12 months.

“How the industry identifies and cares for consumers who find themselves struggling is increasingly important. It remains paramount for the credit industry to keep pace with changing consumer habits to ensure that affordability criteria reflect the reality of the financial situation and continue to deliver outcomes for lenders and borrowers alike.”

The ongoing uncertainty will mean it is paramount for lenders to ensure the predictive models and the assumptions that underpin their lending decisions reflect the realities of changing consumer spending habits, particularly as the consumers navigate a cost-of-living crisis that will place significant strain on their finances.