Debt crisis for Britain's poorest households

More than two-thirds of the poorest families in Britain have problems coping with debts that are typically larger than their annual income, the Bank of England said today.

More than two-thirds of the poorest families in Britain have problems coping with debts that are typically larger than their annual income, the Bank of England said today.

A survey of almost 2,000 households found that while homeowners held the bulk of total debt, the deepest problems were found among those in the rented sector. But the Bank said household debt remained affordable as the share of borrowings held by households reporting problems had fallen over the past decade.

The survey, carried out in September, found that one in 10 renters had a problem meeting their housing costs, while almost half admitted that their debt was a major burden. That contrasted with just 4 per cent of homeowners with mortgage difficulties and one-third reporting general debt problems.

"Renters are more likely to have debt problems but their share of total household debt is small," the report in the Bank's quarterly bulletin said. "Not-withstanding the problems facing some individuals, the survey suggests that overall household debt remains affordable. Although circumstances can change suddenly, by the standards of the past decade relatively few households are close to a stressed position."

It found that 68 per cent of renters with an income of less than £5,000 a year said their debt was either a heavy burden or somewhat of a burden. The average debt held by these people was £5,170. Unsurprisingly, the higher the income the smaller the number of people reporting problems, despite higher debt levels.

There was a more confused picture among homeowners: one-fifth on an income of between £5,000 and £10,000 had a general debt problem, rising to almost half for those earning between £35,000 and £60,000. The Bank said the surge in house prices had left homeowners in a stronger position, while there was evidence that fewer people were borrowing at very high loan-to-value ratios.

This is the second report the Bank has commissioned into the issue, in the wake of mounting concern over the spiralling levels of debt. Mervyn King, the Bank's Governor, has often said interest rates would have to double to about 9 per cent to recreate the scenario that contributed to the recession of the early 1990s, which saw tens of thousands of people lose their homes.

The Bank's report also highlighted concerns over the growth in zero-rate credit cards. It said that almost half of all lenders offered a zero-interest product, while 7 per cent of all unsecured debt in the survey was interest free.

It warned that if the zero-rate deals were removed, those most at risk were those with the highest debt-to-income ratio.