LONDON, Jan 12 (Reuters) - A surprise rise in interest rates this week will add to a post-Christmas hangover for millions of indebted Britons and help tip many into insolvency, experts warned.
Over 8 million people have unsecured debts of over 10,000 pounds ($19,340) and 2 million are vulnerable to going into personal insolvency, according to industry estimates.
A record 30,000 were already predicted to file for insolvency in the first three months of this year as they emerged from Christmas needing to face financial reality.
Thursday's surprise 25 basis point Bank of England interest rate hike to 5.25 percent will increase the strain.
"It couldn't have come at a worse time for a lot of people struggling with debt," said James Falla, managing director of Thomas Charles & Co., a debt management advisor.
"January is the worst time as people start thinking 'I'm really in difficulty, I've overspent, I've had my head in the sand for a few months and now I'm in trouble'. November and December are always slower for us because psychologically people don't want to face up to their problems before Christmas."
Britons are among Europe's most deeply indebted people. Consumer debt averaged 3,500 pounds per person in 2005, more than double the average in France and Germany but below an average of 4,000 pounds in the United States, according to accounting firm PricewaterhouseCoopers.
Thomas Charles estimates that one in five British adults have unsecured debts of over 10,000 pounds, with 2.5 million people struggling to meet repayments and 1.1 million on the brink of insolvency.
Accounting services firm Grant Thornton last week predicted that excessive Christmas spending could send 10,000 people into insolvency and the total for the first quarter may hit 30,000, while Falla said the figure could reach 40,000.
There were a record 27,644 insolvencies in England and Wales in the third quarter of last year. The total for 2006 is expected to reach about 100,000, up about 50 percent from 2005.
CULTURE SHIFT
A number of factors have fuelled the rise.
A third interest rate rise in six months, lifting rates to their highest level for almost six years, is now added to higher utility and council tax bills.
Although a majority of new borrowers are shielded by fixed rate deals, the increase will add about 30 pounds to monthly payments on an average 200,000 pound variable rate mortgage.
"There are over 2 million people who are in a position of irreversible over-indebtedness, who have borrowed more than they will ever repay, and for many this rise will accelerate the speed at which they go over the edge," said Paul Latham, finance director at debt advice firm Debt Free Direct.
Some lenders blame the introduction of individual voluntary arrangements (IVAs), which allow people to write off some of their debt and pay off the consolidated remainder over a few years, for making it easier to escape debt. IVAs accounted for over 40 percent of last year's insolvencies, and their share is rising.
But the real driving force behind the rise has been a change of attitude towards debt, experts say.
"There's no doubt there's been a culture change, and that there's been a 'buy now, pay later culture' so some people haven't been as careful as they ought to have been," said Mike Gerrard, head of personal insolvencies at Grant Thornton.
He said even if people have not been careless they are more vulnerable to default due to the scale of borrowing.
"If you're carrying a big amount of debt it's fine as long as you can pay it off, but as soon as you can't because of some sort of problem then you're very quickly into a spiral of difficulty," Gerrard said.
Debt Free Direct's Latham estimated people setting up an IVA had an average unsecured debt of 46,000 pounds.
The rising insolvencies trend is predicted to continue through at least this year.
Banks have said they tightened lending policies in 2005, but it takes time for bad debts to pass through the system.
"I think we've got another two to three years of seeing people struggling with debt, as there's a conveyor belt that people are on and even if they wanted to they can't stop," Falla at Thomas Charles said.
There has been evidence that consumers have tightened their belts in recent months. Bank of England lending figures showed growth in unsecured lending and on credit card balances slowed in November. Data have also shown savings as a percentage of income have nudged higher.
But some warn that pain for consumers will continue beyond this year, especially when many homeowners on mortgages with interest rates fixed for the first two years shift to new, more expensive deals.
Source: Steve Slater, Reuters
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