Interest Rates and Household Debt

The National Obsession That Could Become A National Disaster

A new report claims millions will be plunged into household debt peril by rising interest rates. Is the Bank of England being flippant with people’s futures?

Britain is, famously, a nation of homeowners. Historical evidence has shown that we are obsessed with owning the house in which we live in a way that our continental cousins find hard to understand. In fact, in order to find a nation that shares our fixation with owning our own home, we have to look across the Atlantic.

Notable Americans from Herbert Hoover to Franklin Roosevelt have espoused the benefits of homeonwership, and their fellow Americans have drank deep on their advice. Still, not even in the States do they obsess about their place on the property ladder to the extent that we Brits do.

However, over the past few years we have gained a new national housing market obsession, one that now borders on compulsion – predicting the future of interest rates.

This should come as no surprise, given that over the past five years the base rate of interest has remained at an all time historic low of 0.5%. The thing about an all time historic low is that there is only one possible direction in which it will travel – up.

Therefore the interest rate guessing game is not about if rates will rise, but rather when. And therein lies the obsession. An obsession that the “unreliable boyfriend” of British economics, Bank of England Governor Mark Carney, seems all too willing to exacerbate.

Having hinted during his Mansion House speech that rates were likely to rise this year, he then played down fears of impending rises over the following days and weeks. Mr Carney’s speech at the Commonwealth Business Conference in Glasgow yesterday represented something of a microcosm of the shifting signals he has presented over the past month, which have resulted in the markets being unsure which way to jump.

Mr Carney seemed to hint that a rise in interest rates could be imminent when he said:

“The Bank is well aware that a prolonged period of historically low interest rates could encourage other risks to develop…in the UK, the biggest risks are associated with the housing market.”

However, he quickly dampened down his own suggestions by claiming that there was no “imminent threat to stability” because mortgage lending levels are currently “more responsible than in the past”.

Carney then quickly added:

“But we have seen time and again how quickly responsible can turn to reckless, creating risks that ultimately derail the economy.”

So, the housing market is a risk to the economy, but it isn’t a risk at the moment, though it could become a risk in the immanent future. Well that’s cleared that up then.

When pressed to make a firmer comment as to when interest rates were set to rise, Mr Carney, perhaps in a glibly self-deprecating reference to recent criticism of his apparent flip-flopping over rate rises, said:

“The clearest indication of when interest rates are going to rise is when they rise.”

Another way of reading this statement is by viewing it as Carney putting his tongue in his cheek and hitting back at all the criticism he has had over the past few weeks in response to the perceived ambiguousness of his attitude toward the timing of rate rises. Essentially, it can be read as a bit of a dig at all those taking part in our new national obsession of rate rise prediction.

Whichever way you choose to take Carney’s paradoxical statement, it raises something of a problem. Interest rates, and the timing of a rise in the base rate, is very far from being a joking matter.

The fact is that the national obsession with interest rates has developed precisely because we are a nation of homeowners and any rise, whether it comes sooner or later, will directly affect the lives of millions of people throughout the country.

This fact was hammered home by a report entitled Hangover Cure: dealing with the household debt overhang as interest rates rise released by the Resolution Foundation today. The report warned that a protracted period of low-interest rates has led the country to become complacent of the consequences that would accompany even moderate increases in the base rate of interest.

The embryonic think tank claims that millions will be plunged into perilous levels of household debt if the Bank rate rises to 3% by 2018, which is in line with market expectations. The report says that under these circumstances the number of borrowers forced to spend one-third of their income repaying their mortgage would rise from 1.1m to 2.3m, while those having to spend half their post-tax income furnishing their debt would increase from 0.6m to 1.1m. Additionally, the report claims that 800,000 of these “highly geared” homeowners would then find themselves in the even more vulnerable position of becoming “mortgage prisoners”, locked into their current mortgages, leaving them exposed to unachievable debt repayments and unable to renegotiate a more affordable deal.

The report recommends that the financial powers that be need to take “three broad steps” to decrease the fallout it predicts will come when rates rise. These steps are:

“maintaining the current window of opportunity afforded by low interest rates until there is evidence of sustained growth in household incomes; making the most of that window by preparing borrowers for the change that is to come; and improving the safety-nets available to those who can’t avoid falling into some form of debt crisis.”

The first of these steps is ultimately related to when rates will rise and, as already noted, at present this seems less predictable than a World Cup semi-final scoreline. Judging by Mark Carney’s recent comments, the Bank is using household indebtedness as one of the main tools with which to decide when the time is right for a rate rise. Yet the recently released minutes from the Monetary Policy Committee meeting earlier this month indicate that they are waiting for wages to rise before considering upping the interest rate, while Carney has often said that the decision on rate rises will depend on the amount of ‘slack’ in the economy. Though there seems to be little clarity in this area, it would seem that the Resolution Foundation and the Bank of England are singing from the same hymn sheet in relation to the first ‘broad step’, even if they are failing to do so in harmony.

In relation to the second broad step put forward by the Resolution Foundation – preparing borrowers for the change that is to come – the most positive assessment of Mr Carney’s erratic statements about the schedule by which rates will rise, is that he is doing just that. Some commentators have recently purported that Carney had no intention of raising the base rate when he gave his Mansion House Speech and he only hinted at doing so in order to slow house price appreciation by reducing market confidence. It seems quite clear however that this is not what the Resolution Foundation have in mind. The recently introduced measures aimed at slowing the market and reducing risky lending, such as the Mortgage Market Review and the soon to be affected restrictions the percentage of high loan to income mortgages lenders are allowed to take on, seem more in line with the Resolution Foundation’s suggestions, but they do not go anywhere near far enough. According to the Resolution Foundation’s chief economist Matthew Whittaker, policy makers should be “prodding” borrowers’ into action and pointing them in the direction of help where appropriate”.

As far as the third suggestion is concerned – the improvement of safety nets designed to help those who can’t help falling into debt when rates rise – Bank of England policy seems worryingl quiet. Mr Whittaker claims that “the regulator must provide better protection” for those who become mortgage prisoners or find themselves overexposed to high levels of unfurnishable household debt when interest rates eventually rise.

Whittaker said yesterday that:

“Ultimately, some borrowers will find they are best served by exiting the housing market. Gradual rate rises mean that the crunch point for such households may still be several years away, but it is right that we act now to improve the availability of safety nets designed to ease such transitions. The government has committed funds to help new buyers onto the housing ladder; it should also stand behind those at risk of falling off. Our “help not to be repossessed” proposal involves home owners selling a stake in their property in order to reduce their monthly housing costs – a form of shared ownership in reverse.”

If you are worried about increasing household debt caused by increasing interest rates, the best thing you can do is attempt to get all your financial ducks in a row before the rise comes. Speak to a financial advisor and see what the best option is for you. If you have to remortgage, do it now while the rates are low, and make sure you get as low a fixed rate as possible. Shop around and do as much research as you can to find out if you have the best deal for you and, if not, switch to a mortgage that is more likely to protect you from the six-fold interest rate rises that likely to occur between now and 2018.

f you feel “exiting the housing market” by selling your home is the best option for you, speaking to a reputable fast purchase property company like National Homebuyers could be the way to go. We are the UK’s largest guaranteed home sale company and, because we are direct cash buyers, we can buy your home in a timescale that suits you. Contact Us today and we will provide you with a fast, comprehensive, no obligation valuation of your home, following the provision of which we guarantee to make you a genuine cash offer to buy your home. We buy any house, completely regardless of condition or location and irrespective of your reason for wishing to sell your home.

So if you are tired of the interest rates guessing game and wish to sell your house fast without any of the stress and hassle involved with other house sale methods, call us on the number above or fill out the form on this page now.