The UK is £1.3 trillion in debt. Why?

by : Luke Ashworth

It is unwise to borrow huge amounts of money where the repayments are only affordable if the interest rates remain at their initial levels.

The day of reckoning has come for a debt-soaked society that has seen outstanding household loans double to ?1.3 trillion in just seven years.

If we don't change our free-spending ways, the Bank of England (BoE) will continue to push up interest rates until the growing threat of inflation is eliminated.

City economists expect a response to debts from the BoE to come by August, which could see the interest rates increase from 5.5 to 5.75 per cent. But the real fear is that this will not be enough and that 6 per cent interest rates will become a reality by the autumn.

This could make this Christmas on the High Street significantly difficult, and if we look back to last Christmas, we thought then that was the worst trading in more than a decade.

Christmas 2006 was tough for traders due the overwhelming amount of debt Britons had raised due to a housing boom and sky high prices for first time buyers. This year will only get worse.

Property experts are now fearing the housing market may not be able to cope with the demand for debt. A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash.

The problem now is that people's borrowing in relation to their income is extremely high. So far, the level of repossessions is a far cry from the days of the early 1990s recession and property crash. Between 1990 and 1993, 247,000 homeowners lost their homes as house prices slumped and unemployment rose sharply.

But the Council of Mortgage Lenders estimates this measure of affordability reached a 15-year record even before the latest mortgage rises kicked in this spring.

For this reason, others think we have already reached the point where the credit crunch is biting. Only in London, Scotland and Northern Ireland are house prices still climbing. Another rate rise would choke this off and push prices in much of the rest of the country into reverse.

To make matters worse, the biggest impact of higher mortgage rates is still to come for many homeowners. Analysts have estimated over one million borrowers who took advantage of cheap two-year fixed rate loans at the end of 2005 are about to experience the shock of their lives.

If we stick with our current mortgage lender, our mortgage rate will jump from 4.94 per cent to 6.75 per cent. In extreme cases, the repayments on a ?400,000 interest-only mortgage would increase from about ?1,400 a month to about ?2,000, up by 43 per cent.

Roughly 70 per cent of mortgages sold in Britain over the past few years have been fixed-rate deals. In fact, the switch to fixed-rate deals has been one of the single biggest shifts in the UK's financial system of the past decade.

A handful of smaller mortgage lenders have already stopped offering fixed-rate mortgage deals altogether since the start of June. Major lenders such have hiked fixed-rate mortgage deals far enough to make them unappealing to consumers.

The government has allowed the UK public’s borrowing to climb and hiding even more?debt in such schemes as the private finance initiative, which store up liabilities for future generations. Unfunded public pensions and student loans (estimated to leave those graduating in 2009 with an average ?30,000 debt) are other growing forms of inter-generational borrowing.

It may be that we have come to rely on?debt to help us out of financial woes, to fund holidays or even just to pay the bills. But the point is, debt has been far too easy to come by for far too long and now we are being deterred by the interest rates. As long as houses prices continue to rise and our incomes fail to increase, the vicious circle of debt in the UK will not end or steady but in fact just become even worse if we continue to borrow beyond our means.

This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase a term life policy at the time of purchase.