Poorest 20 per cent drowning in debt…

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Consumer Debt:

The debt burden for
the poorest twenty per cent of the UK population is threatening to
swamp them warns a leading think tank, the Resolution Foundation.

Given that the
bottom quintile of society in terms of savings, predominately are
renters, this situation is of obvious concern to landlords who depend
on the financial stability of their tenants to sustain regular rent
payments. No doubt many landlords will be looking with some relief to
April when Housing Benefit is set to rise, ending the government’s
benefits freeze.

Around 900,000
households across the UK should see their Housing Benefit payments
increase from April this year as the freeze on Local Housing
Allowance (LHA) rates comes to an end, meaning an average of around
£10 extra per month for households in the private rented sector.

Although the rising
levels of UK household debt are high in absolute terms, when you
compare them to the levels reached during the 2008 financial crisis
they are still below that.

Nevertheless, the
Foundation says that:

“…policymakers
should turn their attention to the spread of consumer debt, and
specifically the extent to which low-to-middle income households are
increasingly exposed. Over the past ten years there has been a 10
percentage point rise in the proportion of lower-income households
using some form of consumer credit (excluding student loans) – they
have nearly caught up (to) their counterparts at the top of the
income distribution. This includes, for instance, a 13 percentage
point rise in the share of households in the bottom income quintile
using a credit card, as compared to a 4 point rise among those in the
middle and 2 points among those in the top.”

Analysis by the
Resolu­tion Foundation shows that although debt levels have
improved since the 2008 crisis, problems are starting to build again
among the poorest one-fifth. Low-income households tend to gravitate
to high-interest loans on credit cards, overdrafts, hire pur­chase
and vehicle finance, putting them under pressure when keeping up with
their housing costs.

Figures obtained by
the Foundation from the Office for National Statistics (ONS) show
that the poorest one-tenth of UK households owed around £18 billion
of non-property debt, and the richest tenth owed far less at £11
billion.

Describing the
lowest group as “potentially vulnerable” the Foundation thinks
that many in this group are “far too exposed” to financial shocks
as the debt burden falls hardest on the poor. It thinks that while
“fears of another debt-fuelled financial crisis are over­blown”,
policymakers needed to “focus on the rising use of consumer debt
among potentially vulnerable groups”.

High debt has become
more man­ageable for the better off as interest rates are at
record lows and this is reflected in mortgage costs. It means the
average-two-year variable-rate mortgage with a 25 per cent deposit at
6.1 per cent in April 2008 is now just 1.4 per cent in April 2017.

Low-earners don’t
often have a mortgage, but they pay dear for consumer credit.
Interest rates on high-cost consumer credit are often a larger share
of their income, and on average three times higher than for the
richest fifth of house­holds. Without savings to fall back on,
they are “far too exposed to financial shocks”, says the
Foundation.

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