Household debt set to rise further after rate increase

Like most in the financial markets, the building societies were expecting rates to stay put. However, this afternoon the Bank of England’s Monetary Policy Review Committee (MPC) announced a surprise increase in UK interest rates, setting the new rate up 0.5 percent to 4.75 percent.

Today’s rise is likely to mean trouble for many households at a time when debt in the UK has reached record levels. In the past few days, both Barclay’s and HSBC have highlighted Britain’s increase in bad debt in there financial earnings reports.

Barclay’s said it had set aside more than £1bn over the first half of the year to cover bad debt – an increase of 50% – with it citing a significant increase in the number of customers unable to meet payments for credit card bills.

On the housing front it seems that more misery will be piled onto households, many of whom have already overstretched themselves with ‘over zealous’ borrowing through remortgaging properties to fund further expenditure on holidays or so called home improvements. Ultimately it’s all debt, and at some point debt needs to be repaid.

There is further likelihood that overall household debt will increase dramatically when short term ‘fixed interest’ mortgage time limits expire. Over the last few years the number of households taking advantage of lower rates, fixed for a short number of years has increased significantly. All of these fixed contracts, though, have ‘lock in’ clauses, with a significant number of these expiring over the next few months, householders will be exposed to the full fury of current market rates. In many cases monthly repayments will increase not by a few percent, but by factors of 50 percent and upwards.Even householders on normal ‘variable’ repayments are likely to increases in repayments by some 5 percent and upward in the next few weeks.

Over the next few months personal debt and personal debt default will be an issue in certain sectors and particular areas of the UK. The knock on effect in the high street and in the housing market will become apparent very rapidly in these areas.