Household debt relief unlikely before 2025 despite rate cuts: Fitch

May 31, 2024 (MLN): Indebted households will not see an immediate improvement in their debt interest-servicing burden until 2025 at the earliest, even as central banks start to cut policy rates, says Fitch Ratings.

In some countries, the interest service burden is set to climb through 2025, with a sharp rise still to come in the UK.

Rising policy rates have pushed up the cost of borrowing in the past couple of years, but there are cross-country differences, primarily reflecting differences in mortgage markets. 

Where long-term fixed-rate loans dominate, such as in the US, Germany and France, households have been fairly sheltered from rising interest rates.

By contrast, in countries that have a greater share of variable-rate loans, such as Australia or Spain, or shorter fixes, such as the UK and Canada, the effective interest rate has risen more sharply, pushing up households’ interest service burden.

Central bankers are likely to start cutting rates later in 2024. Fitch’s forecasts suggest households’ interest service burdens are close to their peaks in some developed markets, such as Australia, Italy and Spain.

However, in others, including the US, the adjustment to higher interest rates has barely started. 

“The UK looks vulnerable as a large number of short-term fixed-rate mortgages reset in 2024 onto significantly higher rates. We see the UK household sector interest burden rising to 6.5% of income by the end of this year from 4.0% at the end of 2023,” said Jessica Hinds, Director at Fitch Ratings.

Fitch does not expect a return to very low interest rates. Accordingly, indebted households will pay more in interest as a share of income than in the past.

While this should be manageable, the rising cost of debt servicing has been an impediment to consumer spending and one which is likely to remain well after policymakers start loosening.

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