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Europeans aren't taking advantage of low rates to manage debt

Wednesday, January 25, 2017 - 10:44

[LONDON] After years of record-low interest rates, Europeans never had a better opportunity to sort out their debt before the monetary-policy tide turns. The problem is, they haven't taken it.

Almost two thirds of people in the region have not seized the chance to take on new loans, refinance or expand existing ones at lower borrowing costs, reduce payments or use savings to pay down debt, according to a survey by ING published Wednesday.

Just 11 per cent of those Europeans who have opted to save less due to low rates have used that spare cash to clear a loan, and only eight percent paid off part of their mortgage.

The findings are a sign that consumers may struggle when rates eventually do increase. While the European Central Bank has extended its quantitative easing plan and the Bank of England is predicted to keep its benchmark at a record 0.25 per cent for at least another two years, rising inflation pressures may mean loose monetary policy is coming closer to an end.

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"Considering that 50 per cent of people in Europe hold debt, more could be taking advantage of low rates to pay down," researchers led by senior economist Ian Bright said.

"Reducing debt allows greater flexibility if there is an unexpected expense, or if other costs rise."

The ING report suggests that even eight years after the financial crisis, many people remain unprepared for financial shocks such as losing a job. In Europe, almost a third of respondents had no savings at all and, of those that did, 36 per cent had less than three months take-home pay stashed away.

The survey found that over a quarter of Europeans hold loans even though they have savings which could pay off at least some of what they owe. That's despite the finding that the average UK household incurred around £650 (S$1136.39) of unnecessary interest charges each year as a result of doing so, according to 2014 research by the University of Nottingham.

The poll of almost 15,000 people in 13 European countries, the US and Australia was conducted in October. Both non-European nations had a smaller portion of households with no savings than the European average of 29 per cent, with the US at 16 per cent and Australia at 23 per cent.

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