Family debt, credit cards and mortgage
Millions of families’ homes are at risk from shock interest rate rises or falls in property prices, Britain’s financial regulator warned on 10 March 2010.
It fears that households who have failed to pay back debts could be pushed to the brink should the economic recovery falter.
Under greatest threat are credit-hungry families who use credit cards and loans to keep up an affluent lifestyle, and young professionals who borrowed many times their income to get onto the property ladder.
FSA chairman Lord Adair Turner warned: ‘This recession is really quite different than the early 1990s’
In a bleak analysis, the Financial Services Authority forecast that any rise in unemployment, interest rates or a further crash in property prices could drastically slash the already stretched incomes of many middle class families.
This would lead to them missing mortgage repayments, and eventually losing their homes.
It will come as a timely warning to thousands of homeowners. Yesterday, it was reported how more than a million desperate borrowers are applying for credit cards with interest rates as high as 60 per cent.
Many economists believe interest rates will start to rise at the end of this year. And this month Halifax and Nationwide both reported falls in the value of houses for the first time in more than a year.
FSA chairman Lord Adair Turner warned yesterday: “This recession is really quite different than the early 1990s. We have households which are more indebted than they were in the past and that creates a vulnerability.”
The FSA’s report examines the state of the economy, and sets out potential threats for households and businesses.
The Bank of England base rate has been at a historic low of 0.5 per cent for one year.
This has helped reduce the amount of homeowners’ mortgage repayments by about £20 billion.
Despite this families have failed to repay their debts, instead choosing to use spare cash to top up their pensions or invest in the stock market. Meanwhile the cost of borrowing on credit cards and loans has risen.
And an estimated 4.7 million homes are still paying mortgage rates that are more than eight times higher than base rate.
The City regulator said that as the economy recovers the Bank rate may need to increase to more ‘normal’ levels, such as those before the recession.
This would ‘increase the cost of debt before household incomes have recovered fully.’
The report said: ‘The high level of debt income has left many households vulnerable to property price, income and interest rate shocks.’
Figures from the Council of Mortgage Lenders show the number of repossessions soared to a 14 year high in 2009 as homeowners were battered by the recession.
However, this was well below the 75,000 that was first expected, mainly due to historically low interest rates and pressure on banks and building societies not to take people’s homes.
Ed Stansfield, an economist with Capital Economics, said: ‘I think we could see a very long tail for arrears and repossessions with high numbers of people losing their home stretching back for many years to come.
“People will realise that more of their income is being taken up by higher taxes or greater debt levels. Any sudden changes in the economy will seriously widen out the number of people that are going to be affected.”
In a further warning the FSA sounded alarm bells that desperate banks were forcing customers to buy expensive products in a bid to boost their own profits.
Banks have seen their takings on current accounts stripped – so are resorting to flogging insurance and investments as a way of making extra money from customers.
And the regulator warned that many consumers are gambling with their retirement savings in a frantic attempt to boost their income to the same level as before the recession.
The report said: “They may be tempted to purchase products (and firms may seek to sell them) with the potential for greater return, but which are not suited to their individual circumstances or which are higher risk than they appreciate or desire.”