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Debt Advice needed to avert a new repossessions crisis

Last week the Resolution Foundation held one of its regular discussion events on debt and low income families, addressed by Adair Turner, with Katie Blacklock and Matthew Whittaker presenting the Resolution Foundation’s latest analysis of which households are most at risk from “debt overhang”. See:-

They have also published a report on some of the alarming data presented at the event.

Whilst historic low interest rates with some households having benefited from a considerable mortgage windfall over the past five years, around one-in-five mortgagors report difficulty meeting their monthly repayments in 2013, double what it was in 2004. Continued debt exposure of many households alongside modest expectations for income growth in the coming years, means that even a modest interest rate rise could trigger a crisis of mortgage repayment affordability. Modelling from the Family Resources Survey suggests that the number of households spending more than one-third of their after-tax income on mortgage repayments is set to rise to 27 per cent (2.3 million) by 2018, and that additionally around a third of households at risk of repayment affordability – especially those with very low levels of equity or in self-employment - are unable to access credit in 2014 in the same way they did before the financial crisis and therefore unable to access re-mortgaging options to protect themselves from the uncertainty of future interest rate is set to stretch up the income distribution as interest rates rise.

The onset of the global financial crisis in 2007-08 produced predictions of a serious fall-out among homeowners on a much bigger scale that the negative equity, arrears and housing repossessions crisis of the 1990s recession. Despite a spike in repossessions in 2009, the full-scale Armageddon never materialised at least in part due to the combination of low interest rates and lender forbearance encouraged by policy interventions such as a new mortgage pre-action protocol as well as the relatively mild house price correction experienced in the UK and the maintenance of reasonably strong employment levels during the downturn. But debt deleveraging by British households since the onset of the financial crisis has been extremely limited, leaving significant numbers vulnerable to future interest rate rises. The Resolution Foundation’s conclusion is that a mortgage debt crisis has been delayed rather than averted.

As wages stagnate and government austerity looks set to continue through to the end of the decade, with potential further cuts in benefits and tax credits, the prospects for income growth in low and middle income households are highly uncertain. With under a third of mortgages on fixed rates, undoubtedly there could be huge consequences to even a half a percentage increase in interest rates – almost certain to occur over the next year.

There were mixed view both amongst the Resolution Foundations panellists and audience as the most effective policy responses and how to ‘restructure’ unsustainable debt in the mortgage market, but everyone agreed on the critical importance of massively up-scaling the money and debt advice sectors in order both to explore preventative options and to prepare for the worst. Therefore there is compelling case for looking at how funding for this sector works – the Low Commission has made various recommendation for maximising the funding capability of the Money Advice Service including reviewing funds are divided between financial capability and debt advice work and extending the FCA levy further into the high cost credit (ie pay day loan) sector.