Debt problems: Interest rate threat

An increase in interest rates could plunge hundreds of thousands of households into debt problems.

That's because nine out of every ten mortgages are on variable rates, according to new research by Legal and General Investment Management.

The vast majority of mortgage holders would therefore find themselves having to pay more if interest rates rise.

The City is expecting interest rates to rise more than once this year – and to rise by two percentage points by the end of 2012 - but LGIM warned that this would create widespread debt problems and put economic recovery in jeopardy.

LGIM's assessment of the proportion of homeowners on variable rate mortgages is higher than many others – because LGIM believes that other calculations have not taken into account those who have been moved from fixed rate deals to variable rates at the end of the former's terms.

Debt solutions expert Kevin Still says: "The governor of the Bank of England has already warned indebted UK homeowners that they may face three interest rate rises in 2011 and this combined with ever increasing fuel costs, insurance premiums, higher VAT and other essential cost of living expenses will put serious financial strain on many household budgets.

"Demands for debt advice are expected to rise significantly towards the end of 2011."

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