The looming interest rate rises must be guarded against, otherwise the indeterminable financial peril the UK could be plunged into could spark a culture of mortgage defaults and excessive borrowing, says influential think-tank.
In a report, outlining 10 key points, the Resolution Foundation urged government to take action now to avoid up to 2 million people being left in the lurch, wallowing in debt due to challenging mortgage repayments.
At a time when the Bank of England is taking a wilfully cagey stance on the timing of interest rate rises, the think-tank called for multiple measures which would inform and aid the public of the economic challenges bearing down on them. The Resolution Foundation stressed that the smallest rise in interest rates would have a profound impact on the number of homeowners struggling with hefty mortgage related debts.
Matthew Whittaker, chief economist at the Resolution Foundation and co-author of the report, said: "It would be a serious mistake to think that the legacy of problem debt built up in the pre-crisis years will simply evaporate with a return to economic growth.
If the BoE fixed rate shoots from 0.5% to 3% by 2018, as has been hypothesised, the number of households affording over a third of their income on mortgage repayments could jump from 1.1 million to a staggering 2.3 million by 2018 ñ roughly equating to a quarter of all households.
The report called on the Financial Conduct Authority (FCA) to force lenders to get in touch with mortgage holders who are subject to high monthly charges, and impress upon them the gravity of the situation. Additionally, it demanded the regulator ought to clamp down on lenders seeking to exploit vulnerable, debt-ridden savers, through the enforcement of sanctions which prevent lenders from rising mortgage rates haphazardly.
Particularly controversial, given the threat of interest rate rises, are mortgages being taken out on the Standard Variable Rate (SVR). Attractive because of the lack of extra charges which accompany it, the SVR spells hell for low-income households if rates rise, for instance a mere 1% increase could add an extra £84 a month in bills for a mortgage of £100, 000. The Resolution Foundation propose the FCA should command lenders to devise 5 year deals which would give borrowers more security in tetchy times. Moreover, the think-tank said the FCA should demand lenders thoroughly explain any increase in their offered SVR to prevent them further manipulating ìmortgage prisonersî, as debt-ridden policy holders, desperate for a quick fix, are known.
The 2 million people most susceptible to further debt, following interest rate rises, include those who have previously struggled with debt, those lumbered with pre 2008, high loan-value mortgages and those so consumed by debt that they stand at the mercy of creditor leniency.
This group should:
Be offered free, instructive financial advice
Perform various scenarios to ascertain how varying hikes in interest rates would affect them
Be contacted by lenders, who impress upon them the enormity of the challenges they could be facing.
Whittaker stated: "The magnitude of the stock of debt is simply too large, given expectations that income growth will be gradual at best.
"And while the mortgage market largely remains competitive, tighter lending criteria means that some highly-stretched borrowers face limited choices. There is a pressing need for regulation to respond to this new context."
Wage Growth needed
The Resolution Foundation expressed its position on the impact of self-employment on official data of wages, saying the Office for National Statistics (ONS) gives an inaccurate depiction of the way things stand.
ìImportant economic and policy decisions are [not] informed by the official data on wages yet, because it does not capture the one in seven workers who are self-employed, it gives a picture thatís incomplete at best and sometimes misleading,î said Laura Gardiner, senior analyst at the Resolution Foundation, and author of the report.
She added: ìOur analysis suggests that relatively high levels of self-employment are here to stay Ö It should be possible to construct a more comprehensive and timely way of measuring wages across the workforce.î
However, the fact remains wage growth, in real terms, is desperately needed. Having stagnated when compared with inflation rates for years now, government has come under great pressure to tackle the wage issue in recent times.