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Three million 'zombie' borrowers at risk if interest rates rise

03 November 2010
Written by rosalind renshaw

Three million 'zombie' households are at risk of falling into financial ruin if interest rates rise, an economist has warned.

Danny Gabay, of Fathom Consulting, says people who took out mortgages beyond their means are on a financial precipice.

He said they were already struggling with their mortgage repayments.

Gabay said: "It is an extraordinary position to be in. Fixing government finances is important but is only part of the problem. The other, larger part, is fixing household finances where in fact the crisis began.

"It is very politically convenient to believe that the crisis was caused by greedy bankers, but nobody made people take out mortgages of five times their income.

"Lots and lots of people borrowed too much."

In a new paper, Fathom Consulting says that low interest rates are allowing banks to avoid facing up to the bad loans on their books.

It calls for the Government to create a new 'bad bank' to buy up toxic mortgages, in order to cleanse the system.

Gabay said: "The solution we are suggesting will be very painful in the short term but if we face up to our debts, we can move on.

"Too much money has been lent against assets that have fallen in value, but those losses have not yet been fully recognised.

"We are being kept alive on a near-zero interest rate drip and we can't move forwards."

He said that the possibility of banks having to make big write-offs was one factor in their reluctance to lend.

Comments

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    According to this chap, ""Lots and lots of people borrowed too much."

    WOW - that is a rich figure coming from an economist. Still, could have been worse, I suppose - 'loads' springs to mind as a REALLY big number...

    See - there's always a positive hidden in these stories... ;0)

    • 04 November 2010 12:04 PM
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    Interesting comment. I suppose the drug dealers only supply what they sell. If the industry and actual economy was better so would most peoples income. Businesses are suffering a loss so do then the incomes. Joe bloggs who bought a home for his family does not cause worldwide recession.

    • 04 November 2010 09:01 AM
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    Not sure this bloke is right on this,

    We have all seen / know people in this position, easy to spot, they didn’t sell up when their salary crashed 2 / 3 years ago, that would be loss of face with the neighbours., they often have a big 4X4 on finance on the drive with bald tyres, and are normally found on modern estates in a big 4 bedder.

    The thing is these guys are hanging on by their finger nails and supported by low interest rates but a lot of them wont get caught out as a large amount of the salary that they got the mortgage on is based on bonuses / commission.

    Whilst they are living on their basic salaries now they will start to get back to earning ‘proper money’ right at the point the rates go up.

    Obviously if you’re on a fixed wage and always have been you’re in trouble so ignore the bit above and sell up.

    Jonnie

    • 03 November 2010 16:15 PM
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    Property prices will fall in the UK (the South East in particular) only when the repossessions start. I remember the early 90's when for a period of a month I worked for an ordinary high street agent and attended at least 1 repossession per day in North & East London. Interest rates will rise, probably in 2012, and then we may see the repo's start and prices really fall, none of this namby pamby 0.2% price drop that we see at the moment, but real whole percentage points.

    • 03 November 2010 10:47 AM
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