Interest rates are rising and I have too much debt. What should I do? Hope the problem goes away? Sell assets? Graft to earn more money? Or hope inflation will wipe out my debts?
Previous generations thrived on hard work and entrepreneurialism to get ahead — as well as inheritance and who you know, not what you know. Thatcher’s generation (mine) learnt to live in a meritocracy that feasted on debt. We worked hard, seemingly to fund the retired older generation’s undercooked pensions. However, for 25 years we’ve borrowed eye-watering sums to pay for our increasingly immoderate lifestyles.
And why wouldn’t you? In 2001 I borrowed a massive wedge to buy a house. Within a decade my home’s value had quadrupled. I sold up, replacing it with a decent primary residence and a second home at the seaside, while substantially reducing my debt to a more manageable level. And because this was my primary residence, no tax was payable.
Did I become debt free? Hell no! A £450,000 mortgage at about 1.2 per cent, fixed for a few years with repayments of £443 a month. That’s perfectly affordable. I’ll not be selling any assets to pay that off — not while house prices continue to rise. Anyway, selling would create a huge tax liability and my second home has never been more useful. The third, in the French Alps, is a delightful escape and that’s not going either — it’s too much of a talking point.
But what happens when those cheap mortgage deals come to an end and lenders demand higher monthly repayments? I can hear Denis Healey from beyond the grave, delighted that the pips will finally squeak.
The UK, like the US, has gone full tilt on debt-funded lifestyles. Analysing the extent of this problem is tricky. Debt is the sexually transmitted disease of finance. People won’t discuss it in public. According to the Office for Budget Responsibility, the UK’s household debt will be £2.62tn by 2026, up from £2.12tn in 2021. That’s £94,500 per household — which doesn’t sound bad. But those are average numbers. Our debt is skewed unevenly across the population and it’s rising.
To date, the cost-of-living debate has rightly focused on those who won’t be able to pay their spiralling bills. Now, though, many higher-earning households up and down the country are adjusting expenditure as their latest energy bills come in, domestic staff ask for pay rises, tradespeople put up their rates and club memberships jump by the rate of inflation. Simple economics dictate that more going out and the same coming in realises a localised deficit. And that’s before interest rate rises take effect. Something’s got to give.
I’ve been down austerity street before. At university, when funds had almost run out towards the end of term, I had “delicious” meals created from noodles and cans of beans lavished on toast. There was also a plan to save on bog paper — the only time I frequented the university library, I recall.
Last week, I was so disturbed by my lack of funds, I decided to save a few quid by shopping at Aldi rather than M&S. It started well. Local asparagus for £1.69 (M&S costs £2.50, while Ocado organic is £4.50 a bunch). An iceberg lettuce, 49p (60p in M&S). A ripe mango at 79p (£1.05). And seasonal English strawberries on special offer at £2.49 (£3.50). Look at me going economical! That’s a saving of £2.19 on just four items.
By the time I got to the checkout the trolley was full and I was presented with a bill for £210. How on earth did that happen? The Châteauneuf-du-Pape at £14.99 (reduced from £24.99, with a 4.2 rating on Vivino) was a contributory factor. A new dog bed, some non-slip carpet to sit by the Aga, car screenwash and a lovely set of sealable containers, perfect for transporting lunch to the beach hut. The cash hosing must stop!
On the way home, I popped into a local shop to buy a birthday card and ended up with a few cushions, some reed diffusers and a box of high-end chocs. “Gosh,” said the shopkeeper. ‘You really do know how to shop!” I replied that I had been taught well by my mother. I love a rinse. But at this rate I’ll need a Rishi bailout, if I am not to end up in serious financial trouble.
My bank phones me every time I go overdrawn. So regular have these calls become that I’m on first-name terms with my manager. While I’m happy to use plastic to collect the points, why max out a credit card to pay their preposterous levels of interest?
Monthly direct debit is the only sensible way to manage expenditure. Yet according to research published by the House of Commons Library, household debt as a percentage of disposable income is on the rise, as is credit card debt. Fixed rate mortgage deals are getting costlier and the average standard variable rate on mortgages reached 4.71 per cent in April, up 0.31 percentage points since December, according to finance site Moneyfacts.
Expect those figures to go up. Yes, interest rates may still be low but the incremental effect of doubling interest payments, with all the added price hikes, could wreck a household budget for even the most affluent.
For the first time in a generation, debt could become a dirty word. For my grandfather it was. He was an entrepreneur in the cloth business. His mantra, conveniently borrowed from Shakespeare, was “neither a borrower nor a lender be”. His point was that debt would end in tears; borrow too much, and you’ll be led into wanton ways.
He lived at a time when people were often paid enough to buy their homes outright and consumer credit was yet to be invented. But maybe it’s time for me to take a leaf out of his book. I’ll save money to spend on items before buying them. I’ll learn to use things for longer before replacing them. I’ll redecorate when there are cracks in the paint and not because Farrow & Ball’s “Elephant’s Breath” is no longer in vogue.
At least, I’ll give it some serious thought. As I write this, I’m sitting on a private jet. It’s very quiet and I have a lovely drink to hand. I’m sure I’ll be able to find some creative ways to cut my cloth accordingly. My grandfather always did like something bespoke.
James Max is a TV and radio presenter and a property expert. The views expressed are personal. Twitter: @thejamesmax