Why do higher earners face bigger debt crises

  • High-income households face relatively higher levels of mortgage debt
  • The BoE has raised interest rates to 5% and mortgage rates are now above 6%

High-income households are at an especially high risk of sinking under piles of debt, new research shows.

Households with a combined income of £60,000 or more per year are most at risk from rising interest rates, as they often take on higher levels of mortgage debt as part of their income, according to research by wealth platform Hargreaves Lansdown. Many earners at this level have taken out mortgages of £300,000 or more.

Following the recent increase in the Bank of England’s base interest rate to 5 per cent, a new fixed and variable rate deal is on the way. A few years ago the base rate was only 0.1 percent.

With a 25-year mortgage on a £300,000 loan, paying 2 percent interest, you’d previously have to pay £1,272 a month. This same deal at 6 per cent interest requires a monthly payment of £1,933 – so £661 extra a month.

The average mortgage debt is around £175,000 for a £295,000 home – but many borrow more to buy larger family homes. With an average salary of £32,000, it doesn’t take much to get into the higher income brackets when there are two people in the household working.

As many as one in four households are now deep in debt because they spend more than they earn.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: ‘Finances are hanging tight – with horrendous hikes in mortgage rates bringing with it worrisome risks that especially hit wealthier borrowers. It’s important to take action now before things get worse to avoid sleepwalking into an unaffordable debt catastrophe.’

Using research collected with help from data researcher Oxford Economics, the wealth platform found that up to a million borrowers now have unsustainable lifestyles and are spending more than they earn.

The research found that people with higher incomes were particularly at risk because they took on higher levels of debt to pay for property, with a third failing to control their spending.

The average household spends 25 percent of their income on mortgage repayments – but for wealthier individuals, it’s closer to a third.

The research also found that over the next 12 months, 26 percent of mortgage holders would be at risk of being in arrears – more than double the pre-pandemic rate. Coles said: ‘High-income people are flying closer to the wind because of debt – they’re borrowing more not only from low-income people but as a percentage of income.

“Only about a tenth of high-income people are considered resilient in terms of paying off debt when there are rising interest rates, as we are experiencing right now.”

Of course, it’s not just the rich who are facing a financial crisis – with low-income households surviving on £20,000 or less struggling to even pay for basic foodstuffs. Those with low incomes spend a fifth of their income on food – while the richest spend only about 5 percent on groceries.

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Taking emergency action early can help households avoid sinking into mountains of debt – and ultimately being forced to sell their homes.

Those with fixed-rate mortgage deals who have savings might consider overpaying on the home loan before the special deal expires — as it’s unlikely to recur soon. You can often pay 10 percent more per year.

You can also consider extending the loan term. Lenders have agreed with the Government that the term can be extended by six months without needing further approval – but it may be worth talking to your mortgage provider for a further extension to lower monthly fees.

Another option if you’re on a payday mortgage is to switch to an interest-only deal for a short time. The government says this can be done for six months without affecting your credit record.

Of course, mortgage debt doesn’t go away, and it accrues at a later date.

You may also need to sit down at the kitchen table to take a cold and hard look at your finances – and look for ways to increase your income and decrease your expenses. One example that might help is accepting tenants to help cover mortgage costs.

It’s important not to miss a mortgage payment without letting your lender know as this can affect your credit score, making it more difficult to borrow money in the future. So talk to your mortgage provider about possible solutions – such as having a payment ‘vacation’ until you can get your finances back on track.

Mortgage: What you need to do

Borrowers whose current flat-rate deals will soon end up facing significantly higher fees and should explore their options as soon as possible.

Those who have agreed to buy a home should also check how much they can borrow and the monthly payments and consider sealing the deal.

This is the best L&C supported L&C-backed mortgage rate calculator can show you the quote that fits your mortgage size and property value

What if I need to remortgage?

Borrowers should compare rates, talk to mortgage brokers, and be prepared to act to secure new rate options.

Anyone with a flat-rate deal that expires in the next six to nine months should look for the best rate they can get — and consider locking in a new deal. Often there is no obligation to take it.

With rates soaring now, if you plan ahead they may drop by the time you need a mortgage. Most mortgage deals allow a fee to be added to the loan and only charged when taken out. By doing this, borrowers can get rates without paying expensive setup fees.

Ask your broker about this and check if you are obligated to take out a rate or can switch to a cheaper deal if the rate drops before you issue a mortgage.

What if I buy a house?

Those who have agreed to purchase a home should also aim to secure a rate as soon as possible, so they know exactly what their monthly payment will look like.

Homebuyers should be careful not to overexert themselves and be aware that home prices could fall from current highs, as higher mortgage rates limit people’s borrowing and purchasing power.

How to compare mortgage costs

The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.

This is Money has a long term partnership with London & County toll free brokers to help readers find mortgages.

You can use our best mortgage rate calculator to show you a quote that matches your home value, mortgage size, term, and fixed rate needs.

Be aware that rates can change quickly, so compare rates well in advance and contact a broker as soon as possible, so they can help you find the right mortgage for you.

> Check out the best fixed rate mortgage you can apply for

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