Government calculations have forecast an additional 18,000 people will go insolvent by 2020 should interest rates rise just 1%, according to figures released exclusively to Moore Stephens.
Moore Stephens says that the Bank of England has come under recent scrutiny from the Treasury Select Committee and senior government figures, with record-low interest rates accused of having “bad side effects.” However, these figures suggest that any increase could be the tipping point for some already struggling under the burden of debt.
According to The Insolvency Service modelling data, an increase of 1% in interest rates would see a total of 275,900 individual insolvencies by April 2020. This would represent a 7% increase on the 257,800 individual insolvencies currently forecast should interest rates remain at their current level.
Moore Stephens says that The Insolvency Service forecasts suggest that even a 0.5% increase in interest rates would mean that 9,700 more individuals would be insolvent by 2020. Those who become insolvent face restrictions on their ability to borrow in the future, as well as damaged employment prospects within, for example, the financial and legal sectors. Moore Stephens explains that there is around a two-year delay for interest rate rises to fully affect the number of individual insolvencies, as most consumers are able to handle the higher payments on their debts initially.
In addition, some borrowers will be cushioned by fixed-rate mortgages and other loans, and lenders will also wait until several repayments have been missed before starting insolvency proceedings. Moore Stephens says that many borrowers have used the low interest rates prevailing since the financial crisis to add to their debt. Outstanding consumer credit reached £193 billion in December 2016, having been as low as £156 billion in November 2012.
Consumer credit in the UK hit an all-time high of £208 billion, in September 2008, the month of the collapse of Lehman Brothers.
Jeremy Willmont, Head of Restructuring & Insolvency at Moore Stephens, said “Interest rates can realistically only go one way in the mid to long term, and there’s a risk that a substantial number of people will suffer when they do increase. Consumers have been taking advantage of the low interest rates over the last decade or so, and lots will have borrowed beyond their means. If rates rise and they can’t make repayments, then borrowing and jobhunting become serious issues. A rise of just 1% in rates could push people over the edge.”