The number of households spending more than half their income servicing debts - which stood at 870,000 before the crisis in 2007 - could exceed one million in coming years if the Bank Rate climbs just 2.4 percentage points to 2.9pc, new research has warned.
If such large numbers were drawn into “debt peril” the consequences would be “profound for borrowers, the financial sector and the ability of consumers to contribute to economic recovery,” the report concluded.
The work, undertaken by think tank the Resolution Foundation and published today, analyses a range of outcomes for households depending on how fast interest rates restore to “normal” levels. Its projections also factor in a range of trends in household income.
The work identifies two vulnerable groups: “debt-loaded” households, who spend more than 25pc of their disposable income servicing debts, and those in “debt peril”, where the proportion of income spent on debt exceeds 50pc.
In 2012 an estimated 3.6m households fell into the less fragile, “debt-loaded” category. But for every upward tick of the Bank Rate more of the “debt-loaded” switch into “peril” status.
In a positive income scenario, where households’ disposable income keeps pace with GDP growth and is fairly distributed across families, the numbers of households in “peril” would rise to 880,000 if the Bank Rate reached 2.9pc by 2017. In a less rosy outlook, where household income growth was weaker and less evenly shared, the number of households in peril would be 1,040,000 by 2017 - with the Bank Rate at the same 2.9pc.
If the Bank Rate rises yet further - to 3.9pc in 2017 - then all outcomes deteriorate further. A positive income trend at this level of Bank Rate would result in 1,080,000 households pushed into peril. A negative income trend would cause the number to swell more, to 1.25m.
The report will make miserable reading for savers, as its thrust is to call upon Government and regulators to “head off a future repayment crisis” - a key plank of which is likely to mean lower rates for even longer. It says that low rates so far have "significantly reduced default and arrears numers...." but adds "....it is not yet clear whether it is providing the necessary breathing space for managed deleveraging or whether it is simply delaying the inevitable."
In terms of suggested policies, it moots strategies "designed to lock-in cheap borrowing for vulnerable debtors as a means of protecting them against future rate increases." The cost of such measures is likely to have to be born by depositors.
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Charts and commentary from the Resoution report