One in four spending more than they have earnt

4th July 2023

New research by Hargreaves Lansdown has found that one in four spending more than they have earnt creating a risk of running up debts.

The study also found that higher-income households are borrowing more as a percentage of their income – and have a bigger share of their borrowing on variable rates and are more vulnerable to changing rates. Almost a third (31%) score ‘poor’ or ‘very poor’ for their control of debt. This group is also more likely to have a mortgage – and be hit by runaway remortgage rates. Overall, over the next 12 months, 26% of mortgage holders will be at risk of arrears.

230,000 of those people who are at risk of arrears have cash savings that cover less than three months of essential spending – so are classed as being at high risk whilst 470,000 mortgage borrowers in this position also have unsustainable spending, so are at critical risk. This is up 220,000 from the end of 2021.

This time next year our disposable income will be 2.5% lower than at the end of the pandemic with 630,000 people will be spending more than they’re earning, have no assets and already have some borrowing – putting them at real risk of arrears.

Sarah Coles, Head of Personal Finance, Hargreaves Lansdown said “Our finances are on a knife edge, with one in four of us spending more than we’re earning, and one in four mortgage borrowers at risk of missing payments. The latest cycle of the HL Savings & Resilience Barometer research shows that debt problems are mounting for those on the lowest incomes, who’ve already cut to the bone, and have nowhere else to go. Meanwhile, horrendous hikes in mortgage and credit card rates are bringing new and alarming risks for wealthier borrowers too. And the damage to our financial resilience is far from over.”

“The HL Savings & Resilience Barometer has consistently shown that higher earners fly closer to the wind on debt. They don’t just borrow more than lower earners, they borrow more as a percentage of income. In fact, when monthly debt repayments are measured as a percentage of income, only 11% of the top fifth of earners are considered resilient – this is worse than any other income group.”

“They’re also far more likely to have a big chunk of this debt on a variable rate, and they’re not just borrowing to invest in things like their property, they’re also buying to finance a lifestyle they can’t really afford: 80% are borrowing to consume. However, the massive black hole opening in their finances will come from mortgages. Oxford Economics forecasts that the Bank of England base rate is set to peak around 5.75%, which would mean there could be more mortgage rate rises in the pipeline.”

“The fact that 81% of the mortgage market is on fixed rates means there’s a long lag in higher base rates feeding into more expensive mortgages, and by this stage only one in three mortgage holders have faced a rise in their monthly costs. As more households refinance over the next 12 months, this will rise to three in five.”

“Those who need to remortgage while rates are higher are set for mortgage misery. When a household spends 25% of its after-tax income on the mortgage, it’s considered to be at risk of falling behind on payments. Right now 23% of people are spending this proportion or more – up from 21% at the end of 2021. Within 12 months, 26% of mortgage holders are expected to be in this position.”

“Meanwhile, in a year’s time, 230,000 of those who are ‘at risk’ of falling into arrears have cash savings that cover less than three months of essential spending – making them ‘high risk’. Plus an additional 470,000 also have unsustainable spending, so they’re at ‘critical risk’. The number at critical risk is up 220,000 when we ran the same figures back at the end of 2021.”