Household debt
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Wealth & assets

Closer to the edge? Debt repayments in 2018 under different household income and borrowing cost scenarios

Matthew Whittaker
Matthew Whittaker

Britain faces the mounting prospect of a household debt crisis as analysis from the Resolution Foundation suggests that a least a million British families, and possibly as many as 2 million, could be spending more than half their disposable income on repayments by 2018

The study uses the latest five-year growth projections from the Office for Budget Responsibility to model how the number of households in ‘debt peril’ may rise over the same horizon – depending on the path of interest rates and the shape of growth in household incomes.

Key findings

  • On the most adverse, but still plausible, scenario looked at in the Resolution Foundation analysis the number of households in Britain who spend at least half their disposable income on repaying debts (and are therefore deemed to be in debt peril) could more than triple – from 600,000 in 2011 to 2 million by 2018. This could happen if interest rates were to rise to 5 per cent – two points higher than the current market expectation but still around typical long-term levels – and if growth in household income was weak and uneven (lagging behind GDP growth and more skewed towards higher than lower income households).
  • Even under a more optimistic scenario, in which interest rates do not rise above 3 per cent by 2018 and in which household incomes grow more strongly than the OBR has projected and is distributed relatively evenly across high to low income households, the number of families in debt peril would almost double – to 1.1 million.
  • Currently most analysts expect interest rate rises to start in 2015 though recent sharp falls in unemployment, bringing it closer to the 7 per cent threshold at which the Bank of England may consider raising rates, has led to speculation there may be pressure to raise rates later in 2014. The Resolution Foundation analysis suggests a sharp increase in the number of households exposed to very high levels of debt by 2018 – on any economic scenario that looks likely given the latest official forecasts.
  • This would mean Britain reaching higher levels of perilous household debt than those in 2007, just before the financial crisis. The number of households in ‘debt peril’ (spending more than half their net income on debt repayments) stood at 870,000 in 2007, just before the crash, but had fallen to 600,000 by 2011 as interest rates plummeted and households deleveraged during the recession.

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