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Rising tides

Joanne Wright, partner and personal insolvency specialist at Begbies Traynor, discusses the possible effects a rise in interest rates could have on UK insolvency figures

Joanne Wright

Last week the Governor of the Bank of England announced that he is prepared to increase interest rates, despite it being widely reported that any rise in household costs could lead to many people experiencing significant financial difficulty.

Recent figures from the Insolvency Service reported that the number of insolvencies during the second quarter of this year rose for the first time since 2010, with 27,029 people declaring themselves bankrupt or entering into an Individual Voluntary Agreement (IVA) – a 5.1% increase compared with the same period last year.

Many people within the industry believe that a gradual rise in interest rates over the next two years could lead to an even greater increase in personal insolvencies.

One reason for this is that historically low interest rates over the last five years has led to many people living in an artificial bubble of financial limbo, with low mortgage repayments increasing the amount of disposable income they have to spend.

At the same time low interest rates has also seen a rise in people using credit cards to supplement their lifestyles. Research by Visa Europe has found that household spending increased for the 10th month in a row in July, with consumers spending 2.4% more on their cards compared with the same month last year.

The leisure sector in particular has experienced a significant increase, with spending in bars and restaurants rising by 8.1% compared with July 2013. The latest Red Flag Alert Report from Begbies Traynor also found that 22% fewer bars and restaurants experienced significant financial problems in the second quarter of 2014, compared with the first quarter of 2014.

Taken together, this is a strong indication that as the economy continues to grow many people are continuing to indulge themselves rather than saving for the future.

Consumers are also making larger, more extravagant purchases. One sector which has seen a boom is car sales, with figures from the Society of Motor Manufacturers showing that new car purchases in the UK have risen by 10% in the last 12 months, with four out of five new car purchases being made using credit.

This could indicate that as confidence grows, some people are returning to pre-recession spending habits and borrowing money to indulge themselves and supplement their lifestyles. Although an increase in consumer spending does have positive effects on the UK economy, an earlier than expected rise in interest rates could force people into financial difficulty as they will have less disposable income to meet the increased costs of their credit commitments.

According to research by Economics Help, raising interest rates by just 0.5 per cent will increase the cost of a £100,000 mortgage by £60 per month; this could have a significant effect on many peoples’ disposable income and push those who are already struggling, or may not have planned for a rise in household expenditure, into an insolvency process.

A rise in interest rates could also affect those who have already entered into an IVA, as even the slightest rise in mortgage rates could mean that many people do not have the money needed to meet their monthly repayments – this could force them to declare themselves bankrupt as they no longer have the means to meet the terms of their agreements.

An interest rate rise could also stall movement in the housing market as individuals shelve plans to move up the housing ladder. Those with current mortgages that are only sustainable because of low interest rates will be viewing the short term implications with trepidation.

At this moment in time, the date of any rise in interest rates is purely speculative, and once implemented is likely to be small, increasing gradually over time. However, it is important that people plan for the future now in order to ensure that they will be able to cover household expenses and any debts that they have, as a lack of planning may lead to more people experiencing financial difficulty once their disposable income is reduced.

Two things however are certain – historically low interest rates will rise at some point, and living on credit is not a sustainable, long-term solution for anyone.

Posted on 28th August 2014 by



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