A surge in consumer credit growth and the prospect of faster-than-expected interest rate rises have recently prompted concerns about the possibility of a fresh debt-bust in the UK, but it is the continuing overhang from the last crisis that is of more concern, according to a new Resolution Foundation report published today.

With levels of consumer credit rising at just under 10 per cent over the course of the last year, overall household debt now totalling £1.9 trillion and the Bank of England stating last week that interest rates may rise faster than previously expected, An Unhealthy Interest? asks how worried we should be and what might happen when rates start to rise.

The report shows that most households look relatively well-placed to cope with rising rates. The cost of servicing Britain’s household debt is low by historical standards, with repayments currently accounting for 7.7 percent of disposable income. This is well below the 12.3 percent recorded just before the financial crisis, and in line with the level seen during the mid-1990s and early 2000s.

The Foundation says the recent surge in consumer credit has been driven primarily by higher income households who are well placed to keep up repayments over the coming years. Much of the growth in consumer credit has been associated with dealership car financing, which places much of the risk on lenders rather than borrowers. It notes too that while debt servicing ratios increased last year for the top three-fifths of households, they actually fell for the poorest fifth.

However, while this new borrowing is not as troubling as some have claimed, a significant number of households continue to have high debt burdens. Households headed by someone aged 25-34 spent nearly £1 in every £5 of their pre-tax income on debt repayments in 2017, compared to 20p for households aged 65 and over.

Even in today’s low-rate environment, many households display signs of ‘debt distress’ the Foundation said. Around three in ten working-age households show at least one sign of debt distress, including 21 percent who have had difficulty paying for their accommodation and 17 percent who find unsecured debt repayments a heavy burden.

The proportion of households in some form of debt distress rises to almost half (45 percent) among the poorest fifth of working-age households, with over a third experiencing difficulty in paying for accommodation and one in six in arrears on either their mortgage or consumer debts.

To illustrate how households might cope with rising interest rises, the report models the impact of an overnight 2 percentage point increase in mortgage rates, while noting that in reality borrowing costs are likely to build much more gradually.

It finds that such a scenario would cause a modest increase in the ‘at risk’ population of households spending 30 percent or more of their pre-tax income on mortgage debt servicing. Currently 12 percent of mortgagor households sit above this threshold, with the Foundation modelling suggesting that this figure would rise to 15 percent (1.1 million households). Among mortgagors in the poorest fifth of the country, 57 percent are already believed to be in the ‘at risk’ group, rising to 59 percent in the modelled scenario.

The report says that overall UK households are well prepared for a new era of slow, measured interest rate rises. But it adds that the scale of the enduring debt overhang would make any return to pre-crisis interest rate levels “catastrophic”, taking debt servicing costs to levels above those seen before the financial crisis. And it warns that the Bank must continue to monitor the distribution of debt across households in Britain as it embarks on further tightening.

Matt Whittaker, Chief Economist at the Resolution Foundation, said: “Rapidly rising consumer credit and the prospect of faster interest rate rises have led some to warn loudly of the imminent bursting of another credit bubble. But these fears appear to be overblown, with much of the recent credit growth being driven by higher income households who are much better placed to service their debts.”

“However, while the recent growth in debt is less of a concern, it is very worrying that almost half of low-income families are already showing signs of debt distress. While rates have been at historic lows for a decade now, many families have experienced a tight income squeeze over this period and have not been able to get back on the front foot when it comes to servicing their debts.

“While the evidence shows that on the whole Britain is well prepared for future interest rate rises, policy makers must have regard for those low income households who are already struggling to pay off their debts, and who could be really exposed if interest rates go up faster than currently expected.”

Commenting on the research Keith Church, Head of Economic Modelling at 4most said “While it is clear that there is a small subsection of the population struggling with debt, the data we have suggest that it is inconclusive to assume that this struggle has intensified over the last year. Although interest rates are important, our experience would suggest that job losses are the main driver of financial difficulty for households. The probability of moving from employment to unemployment remains near historic lows, and by the middle of this year we should also be back in a position where wages are once again rising faster than inflation.”

“As PRA/Bank of England research has shown – and which we’ve seen mirrored amongst our clients – the recent growth in credit has been driven by those with the best credit scores, and a separate Bank of England/NMG survey shows that these people have low debt service costs. However, this does come with a distributional aspect, and it is the younger generations who are the ones more likely to be struggling.”