'Zombie' Borrowers Could Find Themselves Bitten If Interest Rates Rise

 

An economist has warned that if interest rates rise, 3 million 'zombie' households, barely making repayments but kept 'just alive' by the state and market conditions, could fall into financial ruin.

Danny Gabay, of Fathom Consulting, says people who took out mortgages beyond their means are walking a financial tightrope, already struggling with their mortgage repayments.

Mr Gabay said: "It is an extraordinary position to be in. Fixing government finances is important but is only part of the problem. The other, larger part, is fixing household finances where in fact the crisis began. "It is very politically convenient to believe that the crisis was caused by greedy bankers, but nobody made people take out mortgages of five times their income. Lots and lots of people borrowed too much."

In a new report, Fathom Consulting says that low interest rates are allowing banks to avoid facing up to the bad loans on their books. It calls for the Government to create a new 'bad bank' to buy up toxic mortgages, in order to cleanse the system.

Mr Gabay commented: "The solution we are suggesting will be very painful in the short term but if we face up to our debts, we can move on. Too much money has been lent against assets that have fallen in value, but those losses have not yet been fully recognised. We are being kept alive on a near-zero interest rate drip and we can't move forwards."

He said that the possibility of banks having to make big write-offs was one factor in their reluctance to lend.

 

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