Households in the United Kingdom (UK) will need to pay much more on debt servicing as a result of tighter monetary policy, which would likely result in a doubling of interest rates by 2024. According to a report from Fitch Ratings, this will increase the overall cost of debt servicing—which includes interest and monthly repayments—by GBP65 billion to GBP176 billion in 2024.
According to Fitch Ratings’ most recent Economics Dashboard, the total cost of debt payment in the UK will be close to 10% of gross disposable income.
Mostly because Bank Rate is projected to peak at a lower level than in the past, households won’t see interest payments as a proportion of income return to their historical peaks of roughly 8.5% in 2008 and around 11% in the early 1990s.
But the shift to higher interest rates will come as a shock to UK households, which have become accustomed to cheap borrowing over the past decade. The increase in the debt-service burden will be faster than in the mid-2000s, reflecting the faster pace of interest rate increases.
“Even the greater prevalence of fixed-rate mortgages will only be a partial salve given that nearly two million fixed-rate mortgages will still expire in 2023, more than in recent years. Most of these will be re-fixed and at significantly higher rates,” said Jessica Hinds, Director, Economics at Fitch Ratings.
According to Fitch, people would need to spend almost 6.5% of their income simply on loan interest payments by 2024, up from the present level of 3.4%, as a result of the lag effect of rising policy and market interest rates. By the second part of 2024, consistent repayments bring the amount to 9.7% of revenue.
The high increase in debt-servicing expenses that Fitch anticipates will cause will add to the escalating pressure on consumers’ budgets as they deal with rising energy and food costs as well as real income declines.
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