The retirement prospects for many young people are shockingly bad as they are taking on billions of pounds of dangerous debt just as interest rates are set to rise. Figures in an official government report released this month show that banks are lending more money to young borrowers who can barely afford to get on the property ladder. These people are classed as homebuyers who can put down just 5 or 10% as a deposit and then borrow at least three and a half times their salary or two and three-quarters their salary for couples. The amount banks have lent to new buyers such as these has rocketed 670% in the past seven years. In the first quarter of 2010, £279 million was lent to these sorts of homebuyers. In the first three months of this year, the figure is a staggering £2.2 billion, doubling in the past two years alone.
Now, however, experts are fearing that these young families could be hit hard financially within as little as a few weeks following Mark Carney, the Governor of the Bank of England, saying that interest rates could rise in less than seven weeks. This could add hundreds of pounds to the mortgage bills of millions.
Baroness Ros Altmann, the former pensions minister, says:
"There is a whole generation of young people who think it is normal to have interest rates at nearly zero. It's not normal, and a lot of these people will not be able to cope. Many of them will find they simply can't afford their repayments if rates rise, especially if they have big mortgages."
The situation in London is of particular concern, where mortgage payments now account for two-thirds of the average first-time buyers' salary according to data from Nationwide Building Society. A rise in interest rates could, therefore, put severe pressure on people's ability to save for retirement, people being forced to pay what cash they may have had to put into a pension towards their mortgage just to keep a roof over their heads.
However, Bernard Clarke, a spokesman for UK Finance which represents banks in the UK says that the situation is not as bad as some people have portrayed thanks to the strict criteria banks use to ensure they do not over-lend.
"Borrowing rates are at a historical low point, so mortgages for those with a small deposit are more affordable than in the past. Borrowers also have to go through strict affordability assessments, including stress testing. This is designed to make sure they can continue to pay their mortgage, even if interest rates rise by 3 percentage points over the next five years."