Personal Account

We’re borrowing too much, too cheaply and this tower of debt will soon come crashing down. Are we prepared?

Inflation is on the rise. It’s a tangible change that you can see in your weekly shop but that is just the visible peak of the iceberg. Some of this is short-term; pent-up demand has pushed up prices temporarily, while supply problems have resulted in soaring prices for certain products. Much of this will be ironed out in a few years. However, some is sticky. The pandemic has made the world a more expensive place to live – and that is something we all must contend with.

But the looming crisis for household finances is not that prices are rising but what central banks will be forced to do to contain them. It is this threat of rising interest rates that is the hidden mass of the iceberg.

In recent years we have been operating at record low interest rates. Borrowers have become addicted to the sweet nectar of cheap money. Banks are competing for your business and mortgage costs have plummeted.

For those able to take on new debt right now, it has never been this cheap. Young people have never known a time when Bank Rate was above 0.5pc. This is despite the fact that the average since 1975 is 6pc. This is where the threat lies. How many families will sink when that bargain 0.99pc five- year fixed- rate mortgage expires and its replacement costs 2.5pc or more? The answer: millions.

Polling published this week by Ipsos Mori showed that half of Britons would be stretched financially if interest rates were double what they are now. Two in five would use their savings to make ends meet.

Yet mortgage debt is increasing. As we report on page five, eager borrowers are reducing equity in their homes and using the cash to buy more debt-laden properties. This bold strategy is built on a foundation of rising house prices fuelled by low interest rates.

But these towers of debt will come crashing down when it gets more expensive to service.

Consumer debt increased by £47bn in the 12 months to the end of May,

Millions of families will sink when that bargain 0.99pc five-year fixedrate mortgage expires

leaving the average household owing just under £62,000, according to The Money Charity, a debt advice service. Per adult, this works out at £ 32,544, higher than the average annual salary of £29,939. We spend more than £120m on interest repayments every single day.

These figures include all consumer debt, not just mortgages, but it’s worth noting that in May alone mortgage lending rose by £6.9bn while credit fell by £150m. All based on low interest rates, so any increase will send household finances into a spiral.

The average house costs £255,000.

A 70pc repayment mortgage at 1.5pc will cost around £700 a month. At 3pc this becomes closer to £850 and at 5pc more than £1,000.

Millions will have to pay out hundreds of pounds more each month. Food and energy costs will also have increased and I’ll bet wages will not have kept pace.

Financial resilience is not interesting or sexy. But mortgage costs will increase one day and our gung- ho approach to borrowing will have a profound impact on households, the economy and human wellbeing.