The number of families
in "debt peril" could double over the next four years, a think tank
has warned.
The number of
households spending more than half of their disposable income on debt
repayments could hit 1.2 million, the Resolution Foundation says.
This could happen if
interest rates rise to 3.9% by 2017 and growth in household income is weak, it
says.
But this
"worst-case scenario" is gloomier than most economists expect, the
report concedes.
The Bank of England's
base rate is currently at an historic low of 0.5%. Recent comments from Mark
Carney, the new Bank governor, suggest that bank base rates are not likely to
rise any time soon, and current market expectations are that they will increase
to about 1.9% by 2017.
Income
squeeze
Matthew Whittaker,
senior economist at the Resolution Foundation and the report's author, said:
"There is now the real prospect that a large number of households already
burdened with debt could collapse under its weight if economic conditions
tighten.
"If the squeeze
on household incomes continues, Britain could be left in a fragile position,
with even moderate additional increases in interest rates leading to a major
surge in families with dangerous debt levels - especially among worse-off
households."
Under a best-case scenario,
where interest rates rise by current expectations and household income growth
is strong, 700,000 households will still be spending more than 50% of their
income on debt repayments, the Resolution Foundation concludes.
Since 2007, this
number has fallen by 270,000 to 600,000, or 2% of the population, because of
falling interest rates.
But Mr Whittaker
warns: "Policy makers and lenders need to use the current period of record
low rates to defuse debt problems rather than storing them up for the future."
Rising
debt levels
With the government's
Funding for Lending and Help to Buy schemes encouraging banks to lend more to
households and businesses, consumer debt levels are forecast to rise again
after a period of stabilisation, the report says, citing official figures.
Total household debt
is set to rise to £1.8 trillion by 2018, up from about £1.55tn now.
The debt-to-income
ratio is also likely to rise from 143% to 151% over the same period, the report
says, as household disposable incomes are squeezed.
On Wednesday, the
Aviva Family Finances report said that average household debt had already risen
by more than 40% in the past year, with a large chunk being owed to family and
friends.
It studied data from
18,000 families and found that while incomes have been rising, so have debt
levels.
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