Up to 650,000 more U.K. households face "debt peril" if mortgage rates rise unexpectedly before the economy returns to full strength, a think-tank warns.
The Resolution Foundation said on Thursday that 1.25 million households would have to spend half their disposable income on repayments by 2017 if the Bank of England's official rate rose 2 percentage points higher than forecast without a recovery in wage growth.
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While more people between 35 and 50 borrowed heavily than other age group, a surprise rise in mortgage rates would hit younger borrowers disproportionately, according to the research. Families with children were more at risk from "debt peril" than childless couples and single adults. The poor were also more vulnerable – 7 per cent of the poorest fifth of households would see more than half their income eaten up by debt repayments if rates rose unexpectedly, compared with 3 per cent of the richest fifth.
The study highlights the threat to recovery posed by UK households' high debt burden, accumulated during the boom years.
At the height of the boom in 2007, 870,000 households faced repayments that were equivalent to half their income or more. The number of households in "debt peril" fell almost a third between 2007 and 2011, as official rates plunged from 5.5 per cent to their current record low of 0.5 per cent.
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But, while mortgage default rates have been far lower here than in the US, Britons have proven less willing than their American counterparts to take advantage of low rates to repay loans. The U.K.'s fiscal watchdog, the Office for Budget Responsibility, projects the total household debt burden to rise in the years ahead to 151 per cent of income by 2018.