Households on High Incomes at Risk of Debt Crisis, Research Shows
New research conducted by wealth platform Hargreaves Lansdown reveals that households with an annual combined income of £60,000 or more are particularly vulnerable to overwhelming debt. As interest rates rise, these households, often burdened with higher levels of mortgage debt relative to their income, face increased struggles. Many of them have taken out mortgages exceeding £300,000.
Following the recent Bank of England base rate increase to 5%, variable and new fixed-rate mortgage deals are experiencing hikes. Just a couple of years ago, the base rate stood at a mere 0.1%. The impact of these rate changes is evident. For example, a 25-year mortgage with £300,000 in borrowings and a 2% interest rate previously demanded monthly payments of £1,272. With a 6% interest rate, the same deal now requires £1,933 per month—an additional £661.
The average mortgage debt is approximately £175,000 for a property valued at £295,000. However, many households borrow even more to purchase larger family homes. With the average salary at £32,000, a slight increase can place a household in the higher income bracket, where one in four households is currently grappling with excessive debt due to overspending.
Sarah Coles, head of personal finance at Hargreaves Lansdown, stresses the importance of taking action promptly to avoid falling into an unaffordable debt disaster. The research, compiled with the assistance of data researcher Oxford Economics, reveals that up to a million borrowers lead unsustainable lifestyles and spend more than they earn. Higher earners are particularly at risk, as they tend to take on higher levels of debt for property purchases, with a third struggling to control their spending. While the average household spends 25% of their income on mortgage repayments, wealthier individuals allocate approximately a third.
The study also projects that over the next 12 months, 26% of mortgage holders will face the risk of falling into arrears—more than double the pre-pandemic level. Coles points out that high earners, despite their higher income, are not immune to the consequences of interest rate increases. Only about a tenth of top earners are considered resilient when it comes to paying off debt amidst rate rises.
This financial crisis isn't solely limited to the wealthy, as lower-income households, surviving on £20,000 or less, struggle to afford basic groceries. While low earners spend around a fifth of their income on food, wealthier individuals allocate a mere 5% to groceries.
Mortgages: What you need to do
Taking early emergency actions can prevent households from drowning in debt and ultimately being forced to sell their homes. Those on fixed-rate mortgage deals who have savings might consider overpaying their home loan before the special deal ends, as it is unlikely to be repeated soon. Overpaying by up to 10% a year is often allowed. Another option is to explore extending the loan term, as lenders have agreed to a six-month extension without further approval, reducing monthly costs.
For repayment mortgages, temporarily switching to an interest-only deal is an alternative. The government permits a six-month transition without impacting credit records. However, it's important to note that the mortgage debt still remains and must be repaid later.
Additionally, households should thoroughly review their finances and seek ways to increase income and reduce spending. Taking in a lodger to help cover mortgage costs is one example. Timely communication with mortgage providers is crucial to avoid missing payments, which could adversely affect credit scores and future borrowing prospects. Exploring possible solutions, such as payment holidays, until finances stabilize is advisable.
What if I need to remortgage?
For borrowers with expiring fixed-rate deals, it is crucial to explore options as costs will rise significantly. Those in the process of buying a home should evaluate their borrowing capacity, monthly payments, and consider securing a deal promptly. Comparing mortgage costs and consulting with a reputable broker can help navigate these challenging times.
Rates can change rapidly, so conducting comparisons well in advance and seeking broker guidance early on is essential. Utilizing the best mortgage rates calculator on the Mortgage321 website can help identify deals that match specific home values, mortgage sizes, terms, and fixed-rate preferences.