Financial Peril for Millions of Households
3 11 2010Millions of UK households face financial peril if interest rates rise as expected.
Danny Gabay, the leading economist of Fathom Consulting, believes that if the country expects to fully recover from the recession, then the Bank of England needs to find a way of helping those who took out mortgages beyond their means.
The warning that, so called ‘zombie households’ may find their ‘fool’s paradise’ fall into financial disaster when the interest rates rise, is a fear that is mirrored by many of the leading UK economists.
Mr Gabay couldn’t put a figure on the amount at risk, but according to data collected by the Council of Mortgage Lenders, approximately three million homes will be in serious danger of repossession if interest rates increase by two per cent.
With rates currently at low levels, 1.3 million households are still struggling to cope with mortgage repayments, which eat into over 35% of their post tax income; a figure specified by the Financial Services Authority (FSA) at which a loan has become ‘unaffordable.’
“It is an extraordinary position to be in,” Mr Gabay revealed.
“Fixing government finances is important but is only part of the problem. The other, larger part, is fixing household finances, where in fact the crisis began.
“It is very politically convenient to believe that the crisis was caused by greedy bankers but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much.”
This leaves a economists in a difficult position, as interest rates cannot be sustained at their lowest level in 300 years, but with so many borrowers unable to afford an increase, the Bank of England may need to postpone any adjustments for at least a year.
According to Mr Gabay, banks will be reluctant to see the interest rates rise, as they’ll be lumbered with crippling, bad loans.
If the government create a ‘bad bank’ to house all the bad loans, Mr Gabay believes this measure will relieve the difficult situation, as potentially writing-off big debts is causing a reluctance to lend.
“The solution we are suggesting will be very painful in the short term but if we face up to our debts we can move on,” Mr Gabay added.
“We are in a situation that I am very worried about.
“Too much money has been lent against assets which have fallen in value but those losses have not yet been fully recognised.
“We are being kept alive on a near-zero interest rate drip and we can’t move forward.”
David Blanchflower, formally of the monetary policy committee is fully behind Mr Gabay’s review of the current situation.
Mr Blanchflower said: “Anyone who thinks that rates should be raised now or in the next year or two is living on another planet.”
The threat to people living on the edge with their mortgage repayments is very real, according to Sukdhev Johal, reader in business policy at Royal Holloway, University of London.
“There are many people living in a fool’s paradise because of low interest rates,” Mr Johal stated.
“Everything is against people who have over-borrowed, including the threat of negative equity and rising unemployment. The only lifeline is low interest rates and if you take that away you could have properties coming on to the market in a fire sale.”
Categories : Financial Troubles






