Up to 2 million UK families could be spending more than half their disposable income on debt repayments by 2018, according to the Resolution Foundation.
A study carried out by the think-tank, using the latest five-year growth projections from the Office for Budget Responsibility, shows the rise in the number of households left in ‘debt peril’ as a result of an increase in interest rates and household income.
The worst-case scenario shows that a rise in interest-rates to 5 per cent with weak corresponding wage inflation, could leave as many as 2 million UK families using more than half of their disposable income to repay debts.
Interest-rates are expected to rise in 2015, though a recent drop in unemployment has led to speculation that the Bank of England may take the decision to increase the base rate in 2014.
Even a lesser increase to 3 per cent, coupled with good household income growth could result in up to 1.1m households facing debt peril – a significant rise from the 870,000 families facing the same scenario in 2007.
The new Resolution Foundation analysis also comes in the light of a report from the Bank of England based on a survey by NMG Consulting which warned that homeowners with heavy debts could become overburdened if interest rates start to rise before household incomes pick up.
Separate findings from the Bank’s Financial Stability Report in November showed that household debt could rise substantially over the next 20 years – using a measure which could see it increase to almost 140 per cent of incomes compared to the current 100 per cent.
Resolution Foundation senior economist Matthew Whittaker says: “The point at which interest rates start to rise is still likely to be some way off. But we can’t afford to wait until monetary tightening becomes an inevitable prospect before we attempt to deal with the debt overhang that remains in place.
“Rather than waiting for a repayment crisis to strike, policy makers and lenders should seriously consider acting now while there’s still the chance to help people reduce their exposure to debt.”