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More Debt, But Less Expensive

Much has been made about the overall level of debt that the population of the UK has amassed, especially since the total topped the seemingly unimaginable figure of one trillion pounds in recent years.

While the amount of debt that UK individuals have has been on the rise, the rate of interest charged on that debt has been falling, and earnings have been rising also – these factors mean that the debt is actually costing us less now than it did say fifteen years ago when the level of debt was much less, but rates were a great deal higher.

Taking things in relative terms, the burden that having loans and other debts puts on the finances of the borrower is around half that of the early nineties. In percentage terms, the average household now spends 13.8 percent of its income furnishing interest payments, significantly lower than the 25.7 percent that it was fifteen years ago. The majority of this debt is made up of mortgages, and with house prices increasing as they have, the average levels of debt will likely rise with these.

Interest rates would need to increase significantly in order to raise the earnings to interest charges ratio to anything like the levels seen those few years ago. With current interest rates at a historically low point, and given that if anything rates look likely to be further reduced in the near-term, it seems as though the cost of debts are not going to be rising at any point soon, and certainly not to the levels where a quarter of the average person’s income is going on repaying them.

The figures show clear evidence, if any were needed, that the interest rates directly influence the amount of debt that people are willing to take on, and heavily so. With the low interest rates that we have at present, levels of individual debt have been rising, but in relation to the percentage of the borrower’s earnings that the repayments represent, the costs have been falling.

Interest rates, inflation and earnings are all key factors in determining the true cost of loans and mortgages. For mortgages in particular, which tend to be in place for a number of years, these factors have a larger influence – if earnings fall and inflation and interest rates rise during the mortgage period then the cost in real terms will rise dramatically, if earnings rise and rates fall then the cost will fall respectively.