Please remember: Our website can help you make informed decisions, not provide personalised advice. If your investments fall in value, you could lose money.
Tax allowances and the benefits of tax-efficient accounts could change.

Michael Baxter

Inflation comes to the aid of mortgage holders

Written by: Michael Baxter on October 23rd 2012

Category: Thought for the day

We are saving more, and we talked about that here yesterday. Alas it appears we are not paying back mortgage debt. This is worrisome indeed. Before the finance crisis UK households had built up too much debt. In 2012 mortgage debt is as high as ever. But hope comes in the form of inflation.


As swords of Damocles go, all that mortgage debt seems pretty serious. At the beginning of 2008, the stock of mortgage debt in the UK was £1.19 trillion. Right now it’s £1.26 trillion. In other words, despite the money households are saving because lower interest rates are cutting interest payments on their mortgages, very little effort is being made to reduce the actual principal.

Yet savings rates have increased enormously. Between 2002 and 2008 savings ratios were 3.2 per cent. In the last quarter the ratio was 6.7 per cent.

So, yes, we are saving more, but we are not reducing mortgage debt.

At one level the explanation is easy to see. Households are seeing incomes squeezed. So any reduction in mortgage interest payments is gratefully received, and used to make up for all those increasing costs that households have been forced to bear in recent years.

Or to put it another way: yippee, we are better off thanks to lower interest on our mortgages. Let’s use the money we save to fund the extra money we are forking out on our petrol and utility bills.

Despite the fact that there is little evidence to suggest households are deleveraging their mortgage debt Capital Economics has some good news anyway. Thanks to inflation, mortgage debt relative to income is much smaller today than in 2008. In fact, it calculates that as a nominal percentage of disposable income, mortgage debt is now at its lowest level since 2006.

I have some observations.

Firstly, the argument that incomes are being squeezed to explain why households are not reducing mortgage debt does not totally add up. The squeezed income is not stopping households from saving, it is just stopping them from reducing mortgage debt. So isn’t that a bit odd? Most financial advisors advise you to reduce debt before you start putting money into savings schemes or into equities.

On the other hand, bearing in mind that real interest rates are negative, I am not sure that it would make sense for households to reduce debt. After all, rates are so low right now that it is incredibly cheap to service debt. In such times debt makes sense.

It is just that many households’ balance sheets are as precarious as ever. Matthew Pointon, Property Economist at Capital Economics, said: “Even so, this data suggests that many households remain in a precarious financial position. The good news is that interest rates are set to remain low for the foreseeable future, but any fresh deterioration in employment or real incomes could yet trigger another wave of mortgage payment problems.”

Or to put it another way, the sword of Damocles is still there, it is just that right now the threads on which it hangs are quite strong.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Household income, mortgage debt UK GDP, mortgage deleveraging, mortgage principal, real interest rates are negative

Filter view