An impending debt crisis is poised to wreak havoc on UK finances, with one in four individuals spending more than they’re earning and risking accumulating debts, as per the latest findings from the HL Savings & Resilience Barometer.
Released today, the barometer has shown a 1.4 point drop in financial resilience since the end of 2021, reaching a score of 60.8.
Higher-income households are more vulnerable to rate changes due to borrowing more as a percentage of their income and having a larger share of their borrowing on variable rates. A worrying 31% score ‘poor’ or ‘very poor’ for their control of debt. These households are also more likely to have a mortgage and could potentially be impacted by skyrocketing remortgage rates. In the next year, 26% of mortgage holders are likely to be at risk of arrears.
Sarah Coles, head of personal finance, Hargreaves Lansdown, warns: “Our finances are on a knife edge, with one in four of us spending more than we’re earning, and one in four mortgage borrowers at risk of missing payments. Debt problems are mounting for those on the lowest incomes, who’ve already cut to the bone, and have nowhere else to go. Meanwhile, horrendous hikes in mortgage and credit card rates are bringing new and alarming risks for wealthier borrowers too.”
Of the 230,000 people at risk of arrears, they have cash savings that would cover less than three months of essential spending, placing them in a high-risk category. Further, an additional 470,000 mortgage borrowers with unsustainable spending are at critical risk, a figure that has risen by 220,000 from the end of 2021.
The HL Savings & Resilience Barometer has repeatedly shown that higher earners borrow more as a percentage of income and are more likely to have a significant portion of this debt on a variable rate. With Oxford Economics forecasting the Bank of England base rate to peak around 5.75%, there could be more mortgage rate rises on the horizon.
Coles adds: “The damage to our financial resilience is far from over. The massive black hole opening in their finances will come from mortgages. Those who need to remortgage while rates are higher are set for mortgage misery.”
By next year, disposable income is projected to be 2.5% lower than at the end of the pandemic. This economic situation is expected to place 630,000 people, who are already spending more than they’re earning and have no assets, at real risk of arrears.
