Why even high earners can fall into debt: Sarah Coles

I was completely wrong, of course, because I had no idea that underneath the surface of a wealthy lifestyle, an awful lot of higher earners are actually suffering from very real financial issues – including a worrying level of debt. We’ve just run the latest edition of the HL Savings & Resilience Barometer, which looks at the financial health of the nation on all kinds of measures every six months – exploring spending, saving, investing and debt. One constant theme within the results is that higher earners have taken on serious debts. This may be manageable when times are good and rates are low, but there’s a real risk that both of these things could fall apart in the coming months.

The cost of living for the top fifth of earners is eye-watering, and now that inflation has pushed some aspects of their lifestyle out of reach, 80% are borrowing to consume. They don’t just borrow more than average, they also borrow more as a percentage of their income. In fact, when monthly debt repayments are measured as a percentage of income, only 11% of this group are considered to be resilient – this is worse than any other income group.

They’re also far more likely to have a big chunk of this debt on a variable rate, and at a time of rising rates, this leaves them particularly exposed. The Bank of England figures from May found that the interest rate on credit cards has reached a record high of 20.44%. Meanwhile, although overdraft rates have reduced slightly, they’re still charging an average rate of 21.78%. It’s a huge price to pay for going into the red.

In addition to loans and credit cards, higher earners have much larger mortgages, which are likely to create a massive headache in the coming months and years. The fact that 81% of the mortgage market is on fixed rates means there’s a long lag in higher base rates feeding into more expensive mortgages, and by this stage only one in three mortgage holders have faced a rise in their monthly costs as a result of rising rates. Unfortunately, it will affect more people as households come to the end of their fixed rate deals, and by the end of next year, 3 in 5 people will be facing higher monthly mortgage payments. For those who have borrowed significantly, the rises could be excruciating.

When a household spends 25% of its after-tax income on the mortgage it’s considered to be at risk of falling behind on payments. Within 12 months, 26% of mortgage holders are expected to be in this position. Higher earners, many of whom were able to take on huge mortgages while rates were lower, risk being among them.

For those whose children have left home, higher mortgage rates could hit even harder. Those who have helped their offspring onto the property ladder may well find themselves being asked to help make up a shortfall in their monthly payments. Almost one in four parents with assets worth over £250,000 are helping to pay their children’s mortgages.

There will be plenty of people who read this and think it’s a nice problem to have. There’s bound to be talk of the world’s smallest violin, and the question of why most people should give a second thought to the woes of higher earners – who can presumably cut back on staff and take slightly fewer holidays. However, there are more people in this position than you might think, and their incomes may be lower than you expect.

There’s no denying that people in the top fifth of earners are making a significant amount of money. The average net household income for people after tax in this group is £72,118. With two of you earning equally, you’d need to make an average of £36,059 after tax each. It means making £41,230 before tax, which is a big chunk of cash. However, there are plenty of jobs that aren’t considered hugely high earning that could get you there – like a police officer with at least seven years of experience, or a teacher with a leadership role. Millions of people are earning in this bracket, and risk running into debt problems.

It means that if you’re on a good income and are struggling with ever-increasing mountains of debt trying to maintain your lifestyle, you’re not alone. However, you do need to do something about it. There comes a point when you have to accept that you can’t maintain the level of spending you could before, and start to make cuts.

It’s not always straightforward if you have committed to large ongoing costs – including the mortgage or a larger home with higher bills. However, the Barometer shows that you’re also likely to be spending more than average on everything from food and drink to clothes and going out, so with some work it should be possible to bring your costs down.

For my high-earning baby group friend it could mean cutting out the meditation retreat this year – for an awful lot of others it may well mean some tougher decisions about what they need to live without – at least for now.

High street banks unlikely to budge far

The high street banking giants have been hauled over the coals by the regulator, who wanted to know why they weren’t passing on higher rates to savers. Unfortunately, they have several powerful reasons for keeping these rates low, so a stern talking-to from the FCA may not cut the mustard.

The most overwhelming is that they still don’t really need our money. Despite the horrible rates on offer, they’re still sitting on piles of lockdown savings, and cheap cash from the money-printing era. During the pandemic we saw a flight to familiarity, so money flooded into the high street giants, and an enormous chunk of it is still there. Meanwhile, the fall in mortgage approvals means those banks don’t need as much money to fund mortgage lending, so there’s no real incentive for them to push up their rates and bring more funds in through the door.

They’re quite happy maintaining a large gap between savings and mortgage rates, because it effectively means they make more money. This margin was pretty thin throughout the era of ultra-low rates, so they’re making up for lost time. They’re also keen to make cash to put aside for the point where more people start to fall short on repaying debts.

Even when the high street banks have decided to part with some of their margin, they’re likely to have spent it on borrowers rather than savers. We’ve seen this when some have chosen not to pass every rate rise through into their standard variable rate. They know that rocketing mortgage rates will mean more people start to struggle and may miss payments. It’s in their best interests to focus on ensuring people can keep paying their mortgage while rates are higher.

It means that if you have cash sitting in a disappointing account with a high street giant, you can’t afford to wait for them to do the right thing. It’s time to make a switch somewhere more rewarding today.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHargreaves Lansdown