Problems of the rich: my debt becomes an albatross
Interest rates are rising and I have too much debt. What should I do? I hope the problem will go away? Sell assets? Registry to earn more money? Or hope that inflation will erase my debts?
Previous generations thrived on hard work and entrepreneurship to get ahead, as well as legacy and who you know, not what you know. Thatcher’s generation (mine) learned to live in a meritocracy that fed on debt. We worked hard, apparently to fund the undercooked pensions of former retirees. However, for 25 years, we have been borrowing huge sums to pay for our increasingly excessive lifestyles.
And why not you ? In 2001, I borrowed a huge hold to buy a house. Within a decade, the value of my house had quadrupled. I sold, replacing it with a decent main residence and a second home by the sea, while significantly reducing my debt to a more manageable level. And because it was my principal residence, no tax was to be paid.
Am I Debt Free? Surely not! A £450,000 mortgage at around 1.2%, fixed for a few years with repayments of £443 a month. It’s perfectly affordable. I won’t sell any assets to repay this – not until property prices continue to rise. Either way, the sale would create a huge tax burden and my second home has never been more useful. The third, in the French Alps, is a delightful escape and it’s not okay either – it’s too much of a talking point.
But what happens when those cheap mortgages end and lenders demand higher monthly repayments? I hear Denis Healey from beyond the grave, delighted that the glitches will finally creak.
The UK, like the US, has opted for debt-financed lifestyles. Analyzing the extent of this problem is tricky. Debt is the sexually transmitted disease of finance. People won’t talk about it in public. According to the Office for Budget Responsibility, UK household debt will be £2.62 billion by 2026, up from £2.12 billion in 2021. That’s £94,500 per household, which doesn’t doesn’t seem bad. But these are average numbers. Our debt is unequally distributed among the population and it is increasing.
To date, the cost of living debate has rightly focused on those who will not be able to pay their spiraling bills. Now, however, many higher-income households across the country are adjusting their spending as their latest energy bills come in, domestic workers are asking for wage increases, shopkeepers are raising their rates, and memberships clubs increase with the rate of inflation. Simple economics dictates that more output and the same input realizes a localized deficit. And that’s before the interest rate hikes take effect. Something has to give.
I’ve been on austerity streets before. In college, when the funds nearly ran 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 swampy paper – the only time I visited the university library, I remember.
Last week I was so bothered by my lack of money that I decided to save a few pounds by shopping at Aldi rather than M&S. It started well. Local asparagus for £1.69 (M&S is £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 for £2.49 (£3.50). Watch me get economical! That’s a saving of £2.19 on just four items.
By the time I got to checkout the trolley was full and I was presented with a bill for £210. How the hell did this happen? The £14.99 Châteauneuf-du-Pape (reduced from £24.99, with a 4.2 rating on Vivino) was a contributing factor. A new dog bed, a non-slip mat to sit by the Aga, a car window washer and a nice set of airtight containers, perfect for carrying lunch to the beach hut. The treasure hunt must stop!
On the way home, I popped into a local store to buy a birthday card and ended up with a few throw pillows, reed diffusers, and a premium shock box. “My God,” said the shopkeeper. “You really know how to shop!” I replied that I had been brought up well by my mother. I love a rinse. But at this rate, I’ll need a Rishi bailout, if I don’t want to end up in serious financial trouble.
My bank calls me whenever I’m overdrawn. These calls have become so regular that I speak by first name with my manager. While I’m happy to use plastic to rack up points, why use a credit card to the max to pay their absurd levels of interest?
The monthly direct debit is the only sensible way to manage your expenses. Yet according to a study published by the Library of the House of Commons, household debt as a percentage of disposable income is on the rise, as is credit card debt. Fixed-rate mortgages are becoming more expensive, and the average standard variable mortgage rate hit 4.71% in April, up 0.31 percentage points from December, according to financial site Moneyfacts.
Expect these numbers to increase. Yes, interest rates may still be low, but the added effect of doubling interest payments, with all the additional price hikes, could ruin a household’s budget for even the wealthiest.
For the first time in a generation, debt could become a dirty word. For my grandfather it was. He was an entrepreneur in the fabric trade. His mantra, conveniently borrowed from Shakespeare, was “neither borrower nor lender”. His argument was that the debt would end in tears; borrow too much, and you will 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 not yet invented. But maybe it’s time for me to pull a leaf from his book. I will save money to buy items before I buy them. I will learn to use things longer before replacing them. I will redecorate when there are cracks in the paint and not because Farrow & Ball’s “Elephant’s Breath” is out of fashion.
At least I’m going to seriously think about it. As I write this I am sitting in a private jet. It’s very quiet and I have a good drink handy. I’m sure I can find creative ways to cut my fabric accordingly. My grandfather always liked made-to-measure.
James Max is a television and radio presenter and property expert. The opinions expressed are personal. Twitter: @thejamesmax