Collapse in renter affordability and bill payment failures show weaknesses in our finances

The government released this data today, within its data covering economic activity and social change titled Economic activity and social change in the UK, real-time indicators – Office for National Statistics (ons.gov.uk).

Renters spend 28.8 per cent of their income on the rent – up from 26.6 per cent a year earlier and 25 per cent five years earlier.

The percentage of direct debit failures (seasonally adjusted) has risen significantly to 2.21 per cent – from 2.01 per cent a year earlier and 1.68 per cent five years ago.

This is despite the fact that the average monthly direct debit totals have only increased slightly – from £300.50 in July 2019 to £304.91 in July last year and £306.56 this July.

Sarah Coles, head of personal finance, Hargreaves Lansdown said:

“The white heat of the cost-of-living crisis may have cooled for an awful lot of people, but renters are still getting burned. And as more people further up the income ladder loosen the purse strings, they’re missing some vital bills. These weaknesses in people’s finances could come back to bite them.

There’s no let up in the squeeze on renters. They’re now spending a far higher percentage of their income on keeping a roof over their head, and the proportion of their income they’re having to hand to the landlord is rising faster than at any other time in the past five years.

Attention has been focused on the pressure on those with mortgages now that interest rates have risen, but compared to renters, they have nothing to worry about. The HL Savings & Resilience Barometer in July found that those who have remortgaged onto a higher rate between the end of 2022 and the middle of 2024 have an average of just £315 left at the end of the month – £95 less than those who are yet to remortgage. But compare that to renters – who have just £79 left at the end of the month.

For those with mortgages, there’s light at the end of the tunnel, because the Bank of England is expected to cut rates again before the end of the year. For renters, meanwhile, there’s no such hope. Landlords are continuing to sell up – concerned about higher costs from more regulation and bigger mortgage payments. More recently, the trend has been exacerbated by landlords alarmed by the prospect that the government could hike capital gains tax in the Budget. It means more tenants chasing dwindling numbers of properties, so they’re having to pay through the nose to find a place to live.

Financial resilience remains spectacularly lumpy across the UK. The Barometer shows that on average, just over half of households score ‘good’ or ‘great’ for their financial resilience, but this rises to 87% for the highest earners and plumets to just 3% for those households on the lowest incomes. However, these missed bills aren’t about lower earners not having enough money to make ends meet.

This data focuses on direct debits, and because the very lowest earners don’t tend to pay bills via direct debit as much as those on average incomes, it means that a growing number of more typical earners missed bills in July.

The percentage of direct debit failures remains relatively low overall, but it has risen significantly to 2.21% – from 2.01% a year earlier. Some 2.25% of direct debits for electricity and gas bills are failing, this is a record high since the start of 2019 and is higher than in 2022 when bills were much more alarming and inflation was rising ahead of wages. Meanwhile, for mortgages, the failure rate hit 1%. This has only happened once before in this dataset – in December last year. The failure rates for loan repayments are higher, at 3.75%, but this isn’t a record. It’s even higher for gym membership – at 5.65% – but it tends to be higher anyway.

Inflation has fallen, and is now being out-paced by wage increases. At the same time, National Insurance cuts have left plenty of workers with more money in their pocket on pay day. However, some of these failure rates are higher than at the peak pain of the cost-of-living crisis. This disconnect means there’s a reasonable chance that after holding back for so long we’re getting carried away, so there’s nothing left to cover the vital bills.

The risk is that we may end up building debts, or damaging our credit rating, making it more difficult to find affordable borrowing in the future. It means we need to take stock. It may feel like a good time to spend, but it’s a better time to draw up a budget, work out where you’re overspending, and cut back. It also makes sense to check you’re making room in your monthly spending for the kinds of things that will bring joy long after the thrill of a shopping spree is over – like building an emergency savings safety net, paying into a pension or SIPP, and investing in a stocks and shares ISA for the future.”