by Mark Johnston
Although the sustained low interest rates have helped struggling families through tough time, experts are now warning that households are relying on cheap repayments and would struggle if the Bank of England base rate rises.
A top UK economist, Danny Gabay has suggested that the UK cannot recover until both the government and financial services industry deal with borrowers who have taken out loans well beyond their means.
Mr Gabay was concerned that there is a growing number of households that rely on the low base rate to make ends meet. He pointed out that even a slight increase in the base rate will push thousands of families into debt sparking potential home repossessions.
Its hard to say how many people this could effect but recent data from the Council of Mortgages Lenders suggests that up to three million people in the United Kingdom could be effected even if rates rise two percent from 0.5% to 2.5%.
The figures show that there are already well over 1 million home owners who are struggling to make payments even with the Bank of England base rate at the record low of 0.5%.
Mr Gabay said: “It is an extraordinary position to be in. 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.”
In a report written by Mr Gabay, he suggested that the sustain low rate was allowing banks and building societies to hide form the fact that they still have masses of bad debt on their books. Once interest rates go up, its expected that more and more households will struggle because historically banks lent to customers without fully understanding whether they would be able to repay their debt.
One of the suggestions is to create a ‘bad bank’ to allow lenders to sell bad debt to the government. This would allow banks to sure up their books and may stabilise the economy as it would pump millions of pounds of new money into the UK economy.
Mr Gabay suggested “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,’ he told a conference of experts. 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.”
Some members of the Bank of England monetary committee who are in charge of setting interest rates are already calling for an increase. Ray Bolger, a mortgage broker suggested that home owners need to face the real prospect of a rate change. He went on to say: “There are a lot of people who are being bailed out by the low rates. The longer rates stay low the more difficult they’ll find it to cut back as people will start to think of the non-essential spending as essential.”
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