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Debt crisis looms for two million


By Laurence Dodds

A looming crisis in household debt could see two million families driven to "the edge of their means", a leading think tank has warned.

The Resolution Foundation said the number of British households spending more than half their disposable income on debt repayments could triple by 2018.

This is if interest rates rise faster than predicted.

Banks urged to check on debtors

It urged banks to start checking on debtors now, in case they are caught off-guard when the cost of borrowing goes up.

The Resolution Foundation's chief executive Gavin Kelly said: "There is huge uncertainty about income growth and interest rates.

"However, under almost any plausible scenario there is going to be a big spike in the next Parliament.

"We could well be talking about this issue as much as we are currently discussing wages or energy bills.

"As yet there is little sign of the political or financial establishment giving this the priority it deserves."

The projections are based on figures from the Office of Budget Responsibility (OBR).

Household debt rising faster than income

They show household debt rising faster than income and lay out several ways in which the number of people facing "debt peril" might rise from 2011's total of 600,000.

In a "good growth scenario", where interest rates stay low and income grows evenly across rich and poor, the number of people facing "debt peril" would still almost double, to 1.1 million.

But if interest rates go up and growth is slow or unequal, that figure would hit two million, rising from 5 per cent to 9 per cent in the bottom fifth of the income curve.

Matthew Whittaker, senior economist at the Resolution Foundation, said: "Even if we take a somewhat rosy view the number of households severely exposed to debt looks as though it will double.

Families struggling with heavy debt

"This is an alarming prospect, where a large number of families find themselves struggling with heavy debt commitments.

"Even small increases in the cost of borrowing could push a significant number of families over the edge.

"It's most likely to happen to those with the lowest incomes who are already spending the biggest share of their budget on repayments."

Most of the UK's household debt is composed of mortgages, with the rest taken up by credit cards, personal lending, and payday loans.

Since household consumption accounts for about 65 per cent of GDP, any drop in disposable income could have a huge effect on recovery.

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