Yahoo Finance How to weather the looming debt crisis
There’s a debt crisis looming and it risks sending hundreds of thousands of households under as the cost of living crisis continues to bite. The HL Savings & Resilience Barometer measures the state of our finances across everything from how much money we have left at the end of the month, to debt and savings, and the findings out this week reveal the alarming level of debt we’re building.
Runaway price rises mean one in four of us are currently spending more than we’re earning. In theory we can get back on top of our finances by cutting back, or spending any savings, but after 18 months of eye-watering inflation, there’s nothing left to cut, more people have spent all their savings, and we’re going deeper into debt. One in 10 people have already fallen behind on bills.
Once you take inflation and pay rises into account, the amount of money we have in our pockets will fall 2.5% by this time next year – by which stage 630,000 households will be spending more than they’re earning, have no savings left, and will be in debt.
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The lower your income, the harder you’ll be hit, and 289,000 of households on the lowest incomes will be in this position. However, even those earning more face serious trouble: 380,000 renting households will also be in this position – along with 321,500 who are parents.
Average earners are suffering too. Fewer than a third of them have enough cash left at the end of the month to be secure. Meanwhile, around three quarters have unaffordable levels of debt. When you factor in every aspect of their finances, around a third have ‘poor’ or ‘very poor’ levels of financial resilience. This isn’t a group that’s used to struggling. In the past, they will have been on top of their finances, and had money to spare after paying the bills. It means many will be facing all these problems for the first time.
For those with a mortgage, the stress will be even more extreme. At the moment, because 81% of the mortgage market is on fixed rates, only one in three have seen their monthly payments rise since the Bank of England started hiking rates. By this time next year, three in five people will be affected. The average two-year fixed rate mortgage is around 6.3% at the moment, according to Moneyfacts, and for those remortgaging from a rate below 2% there’s a debt nightmare in store.
When a household spends 25% of its income on the mortgage it’s considered to be at risk of falling into arrears, and within the next year over a quarter of households are expected to be in this position. We dug a bit deeper to see what the finances of this group of borrowers were like, and found that 230,000 of them don’t have enough emergency savings. It means they can’t use this to cover the mortgage, so they’re at high risk. Another 470,000 of this group don’t just have insufficient savings, but they’re spending more than they earn too, so they’re at ‘critical risk’.
What to do if you can’t afford a remortgage
If your mortgage is coming up for renewal and shopping around doesn’t bring monthly payments within the realms of affordability, you still have some options. You can talk to your lender about extending the term of your loan or moving to an interest-only deal, because the banks have agreed to make this easier for a six-month period. Both will bring down your monthly costs, but bear in mind that at the end of six months you’ll either need to make higher payments to make up for lost time, or permanently move to a longer term, which means you’ll pay more interest in the long run.
Alternatively, you could look elsewhere for help. This could mean boosting your income through things like taking in a lodger, taking on more hours at work, or checking whether you can apply for any state support. It might also mean asking for help from family, because increasingly parents are stepping in to help pay their offspring’s monthly mortgage bills.
You may need to approach your lender and explain you need more help. They have a duty to try to help you pay your debts, so they can consider a number of steps – including payment deferrals – which you might know as payment holidays. This will come at a cost, because you will need to make up these payments later, and it will be noted on your credit file. However, it will do less damage to your credit than missing payments entirely, so is worth considering.
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If all else fails, you may need to sell up. People tend to fight this for as long as possible, but it pays to be honest with yourself as soon as possible. If it’s just too expensive, you can save months of worry by putting your home on the market sooner rather than later.
Unfortunately, at the moment, it could take some time to sell, and you may not get as much for your property as you expected. However, you can talk to your lender about how to manage mortgage payments in the interim, so you can sell up without building more debt problems for the future.
None of the solutions are easy, and none of them would be our first choice, but with a debt crisis of this size hanging over our heads, we need to do whatever it takes to get us through.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
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