Debt charities warn of rise in personal debt levels

Personal debt levels are likely to soar higher in 2008 as more Britons struggle to meet higher mortgage payments and secure low-cost loans, debt charities say.

The dual effect of five interest rate rises and the credit squeeze are set to have further repercussions this year as the more than 1m borrowers estimated to be coming off fixed-rate mortgages are forced to sign up for more expensive deals. Stricter standards for lending and a scarcity of deals on balance transfers and new loans are also likely to pose challenges to borrowers with high-levels of debt.

Even if the Bank of England cut the base interest rate - currently 5.5 per cent - in coming months, the savings might not be passed on to mortgage customers.

Last month, economists from the Royal Institution of Chartered Surveyors said they expected the number of home repossessions across the UK to rise 50 per cent from last year to 45,000 in 2008 when "mortgage resets begin to bite".

An average rate for a two-year, fixed-rate mortgage, meanwhile, climbed to 6 per cent at the end of 2007, up from 4.8 per cent in 2005, according to the Savills, the mortgage broker.

A surge in repossessions and a slowdown in the buy-to-let and primary property markets could further hamper people's ability to pay down their borrowings.

"We anticipate that there will be more people getting into difficulty," said Becky Boden-Wilkes of National Debtline, the debt charity.

In recent months, the UK's leading debt charities have seen a surge in the number of inquiries from indebted people either considering bankruptcy or entering into an individual voluntary arrangement (IVA).

Citizens Advice reports receiving hundreds of thousands of requests from debtors in London, Liverpool, Manchester, Birmingham and Nottingham in the last year and a jump in interest over the Christmas period.

"People coming to us for advice in recent months have been more likely to keep their appointments," reports Malcolm Hurlston, chairman of the Consumer Credit Counselling Service.

KPMG, the auditor, meanwhile, predicts personal insolvencies - which combine bankruptcies and IVA agreements - in England and Wales will rise to more than 130,000 from the 109,615 seen in 2007 as the credit crunch pushes lenders to reject loan applications.

"Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge," explained Mark Sands, KPMG's director of personal insolvency. "The credit crunch is resulting in increased rejections of credit card applications and a reduction in the availability of loans secured by a second charge on the family home.

"Those in difficulty will find that their options are becoming limited - formal insolvency will, for many, be the only way out."

Last year, creditors wrote off at least £1.3bn in bad debts as more people entered into IVA agreements, according to KPMG. While the trend in IVAs has declined, this is partly because of a hold-up in the processing of IVAs caused by fee discussions between banks and insolvency providers.