Why higher earners are facing bigger debt crisis
High-income households are at particularly high risk of sinking under a mountain of debt, new research suggests
High-income households are at particularly high risk of sinking under a mountain of debt, new research suggests.
Households with a combined income of £60,000 or more a year are most at risk of getting into trouble if interest rates rise, as they often take on a higher level of mortgage debt as part of their income, according to wealth platform’s research Hargreaves Lansdown. Many earning at this level have taken out mortgages of £300,000 or more.
Following the recent increase in the Bank of England’s base rate to 5 percent, variable and new fixed interest rates are being raised. A few years ago, the base interest rate was only 0.1 percent.
With a 25-year mortgage on £300,000 loans, with interest at 2 per cent, you would previously have paid £1,272 per month. This same deal at 6 per cent requires monthly repayments of £1,933 – so an extra £661 per month.
The average mortgage debt is around £175,000 on a house valued at £295,000, but many borrow more to buy a larger family home. With an average salary of £32,000, it doesn’t take much to be in the upper income bracket if two work in the household.
Under pressure: as many as one in four households are now sinking under a mountain of debt because they spend more than they earn
As many as one in four households is now sinking under a mountain of debt because they spend more than they earn.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, says: ‘Finances are on the cutting edge – with horrific increases in mortgage rates posing alarming risks, particularly affecting wealthier borrowers. It is vital to act now before things get worse to avoid sleepwalking into an unpayable debt crisis.”
Using research compiled with the help of data researcher Oxford Economics, the wealth platform found that up to a million borrowers now live unsustainable lifestyles and spend more than they earn.
The study found that higher income earners are particularly at risk as they take on higher debt to pay for real estate, with a third failing to control their spending.
The average household spends 25 percent of its income on mortgage payments, but for wealthier individuals, it’s closer to a third.
The survey also found that 26 percent of mortgage holders are at risk of default over the next 12 months – more than double the pre-pandemic level. Says Coles, “High earners are flying closer to the wind on debt – not only are they borrowing more than lower earners, but also as a percentage of income.
“Only about one-tenth of top earners are considered resilient when it comes to paying down debt when interest rates rise, as they are now.”
Of course, it’s not just the wealthy who are facing a financial crisis – with lower-income households living on £20,000 or less struggling to afford even basic groceries. Low-income earners spend a fifth of their income on food, while the richest save only about 5 percent for groceries.
By taking emergency measures early on, households can avoid sinking into a mountain of debt and eventually being forced to sell their homes.
Those with a fixed rate mortgage who have savings may want to consider overpaying the home loan before the special deal expires – as this is unlikely to be repeated anytime soon. You can often overpay 10 percent per year.
You could also consider extending the term of the loan. Lenders have agreed with the government that a term can be extended by six months without further approval – but it may be worth talking to your mortgage lender for a further extension to reduce monthly costs.
Another option if you have an amortization mortgage is to switch to an interest-only deal for a short period of time. The government says this can be done for six months without affecting your credit rating.
Of course, the mortgage debt does not go away and must be paid later.
You may also need to sit down at the kitchen table and take a closer look at your finances and figure out how to increase your income and reduce your expenses. An example that may help is hiring a tenant to cover mortgage payments.
It is vital not to miss any mortgage payments without letting your lender know, as this can affect your credit score, making it more difficult to borrow money in the future. So talk to your mortgage lender about a possible solution, such as a payment holiday until you can get your finances back in order.
