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One topic that has taken the forefront of all financial discussions are the interest rates and whether an impending housing market crash is in the immediate future.

The predictions vary depending on whether you ask an IVA firm, a realtor, an economist, or an opinionated writer.  One of the fundamental truths about the financial market is that many factors are influenced by the population’s opinions.

A healthy economy can stall if consumers loose confidence in their economy and stop spending.  This creates a ripple effect that touches every sector of the economy from lenders offering first-time homeowners a homeowner loan, to corporation takeovers.

“Affordability” is the key measure of the sustainability in any market.  This truth is being broadcast as fact over the internet, causing many homeowners to back off on their plans to borrow a loan or improve their home.

The measure of affordability has been the ratio of house prices to average income. This ratio has ruled in the UK economy for decades. However, not the UK is following trends in other countries where people have learned to accept the fact that they will never own their home.

The house price analysis website houseprice.crash.com shows a time series analysis of this ratio. This report states that the correction in the housing market usually levels out about four times the homeowner’s income.

This may point to a problem in the market, when looking at the UK market, but the figures are less disturbing when taking a global look at the housing market.  There was a similar panic when the ration breached five times in 2002.  This did not cause a housing price crash.

Economists are divided on their reason why interest rates are climbing, but they are in agreement that we may see double digit interest rates before the end of 2007.  Some analysts believe that the government regulations against illegal bank charges, Payment Protection Insurance (PPI), and other financial products is forcing the banks to find other ways to bring their profits back in line with their projections.

Other analysts believe that the banks are loosing too much money from bad debts and IVAs and are being forced to transfer the cost onto consumers who are willing to pay for the privilege of borrowing money.

Either way, the cost of borrowing a personal loan is expected to become more expensive in the coming months.

Michelle Slade, personal finance analyst at moneyfacts.co.uk said:

“With the OFT due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a ‘pay as you go’ type policy rather than single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.”

There are still loans available at ‘sub six’ rates, but the fine print may contain fees and charges that will make up for the loss.

One thing is certain, if the government takes a stand against PPIs then the High Street banks will be forced to find the money elsewhere.  Consumers are already starting to switch to lifestyle protection, and insurance that offers them more coverage at a lower cost.

The Debt Counsellors released a new survey that suggests that more than 50 per cent of those seeking help with their debt problems owe more than £15,000.  This is a £5,000 increase from a similar report published only four months ago.

The Debt Counsellors Annual UK Debt Survey 2007 reveals that 57 per cent of people who are actively seeking debt help owe between £15,001 and £100,000, and 12 per cent have accumulated debts of more than £50,000.

Women, 25 to 44, lead the group at 55 per cent.

Surprisingly, 71 per cent of debtors who need professional help do not carry a mortgage.  Also, 71 per cent less than £20,000.

Credit cards still lead the way, causing the biggest problem, with 26 per cent owing between £5,001 and £15,000 on their cards.  An incredible 13 per cent carry credit card debt of £25,001-£100,000.  This is an unsecured loan that may carry interest rates as high as 20 per cent.

John Porter, a senior counsellor with The Debt Counsellors, says the new survey throws a revealing light on the causes of debt.  Porter said:

“It is clear from looking at the results of the survey and comparing the levels of debt and income, many people are building up debts that are impossible to sustain.

“However, the positive thing is that these people have shown the good sense to get professional debt help, and anyone worried about their debts should do the same.”

“There are debt solutions for even the most serious cases and legal processes such as the IVA, or Individual Voluntary Arrangement, can often help people with debts of over £15,000.

“The best way to find out more about these debt solutions is to speak to a professional debt counsellor.”

The Office of Fair Trading reprimanded 17 IVA companies for issuing misleading adverts. Two new companies were add to the list within the last couple of weeks.  It admits that it is considering action against a number of others.

Last week, the Consumer Credit Counselling Service, said it will start putting pressure on the IVA sector.

The result of this pressure is hitting all sectors of the IVA industry. All companies have experienced a 10 per cent drop in share prices in recent weeks.  With several of the major companies issuing warnings.

The market is shaken by a recent, growing trend, that sees lenders refusing to approve IVAs. An IVA is not legal unless  75 per cent creditors approve the IVA.

Paul Carter, the chief executive of debts.co.uk, said:

“This is still a very young sector, and there’s been very strong predictions for its growth, so we’ve been well aware that as soon as anyone came out with a profits warning that it would send a shockwave through the industry. But people are viewing the industry as one, and are not looking at the individual companies. We are in our ninth year of trading. We’re not experiencing the same problems our competitors are.”

Lenders began to express concerns over the IVA sector when customers were being sold IVAs as a way of escaping debt, instead of a part of a debt management plan.

The British Bankers Association conducted a mystery shop of IVA providers last year.  The result was serious concerns about the advice given debtors.  It said IVAs should only be sold to about 5 per cent of cases, but their research suggests that the actual sales are much higher than these numbers.

The Office of Fair Trading criticised 17 firms for misleading advertising that did not spell out the full implications of IVAs, in a statement last week.There is concern that some firms are cohering sales people to promote IVAs to indebted adults so they can earn commissions that averages £6,500.

The Insolvency Practices Council (IPC) has reported on rogue practitioners who sell IVAs to benefits claimants.  These people rarely have any chance of meeting the required payments.  They will loose the IVA fee, and stack-up several hundreds of pounds in fees, before being forced into an inevitable bankruptcy.

Mervyn King, the Bank of England Governor, warns that the £1,200 billion debt mountain is a social problem.   Until now, many people are holding the belief that the debt is a personal problem, or limited to the lower-income sections of society.

This comes on the heels of reports that indicate the number of women bankrupts.

The accountancy firm Wilkins Kennedy, claims that the proportion of female bankrupts has risen from 32 per cent in 2000 to the current 44 per cent, and is expected to reach 50 per cent in 2009.

The firm has two classifications of women who claim bankruptcy.  Those who are overspending to sustain a lifestyle they cannot not afford, and those who suffer as single mothers or divorcees.

The CCCS reports that nearly half the people they recommend bankruptcy as a solution to their debt problems are single women. The average debt of this group is £30,293. Half of the CCCS clients blame the unexpected and emergencies for their debt problems. The most common problems are a relationship breakdown, illness and employment.

Despite the fact that Consumer watchdog groups have been warning consumers to be careful, this month will see thousands of UK consumers turning to debt management schemes that will, possibly, cost them everything in the end.

“We often see people that have taken out a consolidation loan,” Meg Van Rooyn, information officer for National Debtline, told BBC News Online in 2003.

“A major danger is that people tend to look at how much they borrow not how much they will pay back in total.”

Prior to this, in December 2001, the Office of Fair Trading (OFT) established guidelines for the debt management industry.

The OFT dictated that firms needed to conduct a thorough review of clients’ financial position, reveal their fees upfront, and not mislead consumers into thinking that repayment of their debts would improve their credit rating.

In 2003, The Consumers’ Association mystery shopped seven leading debt management firms, all failed the OFT test in one or more ways.

In one instance the charges that the management firm would impose were larger than the debt repayments.

With the introduction of IVAs, it became more difficult for consumers to find a responsible method of reducing their debts.  Many are paying exorbitant fees for a service that garnishes their money for five years, and still leaves them with no credit rating.

One word of caution is being whispered by debt consolidation and debt management firms in the UK, buyer beware.  They are warning consumers to take time to find a good firm.  Never be ‘sold’ by a fatherly or motherly salesperson who treats you like family.

Instead, the best way for consumers to avoid bankruptcy is to shop around, ask for advice, and take their time.

The national charity Citizens Advice is advising UK consumers to take charge of their spending habits and debt early in 2007.  However, they admit that these are not the only causes of debt problems.

Last year Citizens Advice bureaux dealt with more than 1.4 million debt problems. This equals 5,300 debt problems every working day.  The charity claims that these  figures will rise in 2007.  The question is who will be hit hard, and who will not feel the pinch.  There is no logic to the numbers. Many high income households are petitioning for insolvency while millions of low income households are asset-rich and safe from a financial disaster.  The answer is not in income, debt load, or employment. The answer is in money management.

Citizens Advice believes people pay a high price for their ignorance and ill-informed debt management and personal loan choices.  Consumers who are unconfident when making crucial financial decisions are also in the high risk category. For many of these people, the Christmas debt ‘hangover’ will turn into a nightmare because these people will ignore the problem until it is too big to manage.

Ignorance is the number one reason why consumers are turning to IVA companies to find debt relief. This is the worst way to manage a debt problem, because the companies who advertise these ways make their profit from handling debt burdened consumers.  These companies have everything to gain from indebted consumers and nothing to gain from financially savvy borrowers.

The Debt Counsellors, debt advice organisation, produced a report to heighten public awareness of the problems associated with debt management programmes.

The total personal debt in the UK exceeded £1.28 trillion as of the third quarter of 2006.  This is increasing by £1 million every four minutes. While reports by the Bank of England show that the country’s alleged ‘mountain of debt’ is not as formidable as most people believe, many consumers are searching for ways to reduce their debts.

Debt management programmes are preying on the vulnerable. This is most common in debt management companies where the finance company takes control of the consumer’s debts. In turn, they deal with creditors in return for a monthly fee, fees for late and missed payments, and extra fees if the consumer takes a part-time job, or participates in overtime.

The Debt Counsellors’ Debt Management Report stresses that consumers need to seek professional debt counselling advice before signing these agreements.  Many of these programs, including IVAs, compound the debt problem.

John Porter of The Debt Counsellors explains: “Debt management programmes can appeal to people struggling with bills but some deals work out more expensive in the long run than the original debts because of higher interest or longer repayment periods.”

The Debt Management Report explains the dangers of debt management programmes and offers alternative solutions to serious debt problems.

Porter adds: “We strongly advise anyone considering a debt management programme to get professional debt help first. The Debt Counsellors give free, confidential advice on debt problems and can explain all the options available.”

The year 2007 will see hundreds of thousands of UK consumers reach their debt “saturation point”, according to a report the respected debt campaigning charity, Debt on our Doorstep,  gave the BBC within the last six weeks.

Damon Gibbons, chair of campaign group Debt on our Doorstep, claims that a relatively small increase in interest rates, within the current economics forecasts, will spell financial doom for many.

Mr. Gibbons claims this may start a detrimental “snowball effect” that will soon encompass the entire economy.

“People struggling with their debt repayments put their properties up for sale,” he said. “This in turn increases supply and reduces house prices.

“This has a snowball effect - falling prices leads to people who have borrowed against the increased value of their property or buy-to-let investors heading for the exit.

“In turn lenders who have overcommitted, rush to repossess as soon as people get behind with their mortgage re-payments.”

This is in contrast to the Bank of England’s report which claims that most UK consumer’s debt load is in the warning, rather than ‘red light’ range.  This may result in the Bank of England adding the third interest rate increase in the last fiscal year.   The bank is focused on lowering the inflation rate.

However, debt charities across the UK object to the Bank of England’s ‘at all cost’ attitude that will see many people loose everything they have worked for.   Debt charities are upset that the Bank of England’s alleged refusal to anticipate rising tax and utility costs before estimating the impact another interest rate will have on homeowners.

HSBC, the UK’s largest bank, sees no indication that the UK consumer will grow tired of using IVAs to release them of their loan burdens.

The bank’s 2006 pre-close trading update reveals the results of the trend ‘seen since the second half of 2005.” No research indicates that the use of IVAs to pay off loans will abate in the next six months. This has led the banks to call on the government to step in and stop the drastic increase in bad debts.

Bad loan injury jumped 36 per cent. In the first nine months of 2005 the people who defaulted on loans jumped 65 per cent, to a total of 77,000. This is according to the Insolvency Service.

Record numbers of UK consumers are declaring bankruptcy or entering into individual voluntary arrangements (IVA). The major lenders in the personal loan and credit card markets are accumulating huge amounts of bad debt.

HSBC said: “ On a year-to-date basis, underlying revenue growth slowed, attributable largely to the aggregate of seasonal variations in fee income, a conscious decision to slow the rate of lending growth in more finely priced markets, fewer disposal gains and a weaker trading performance in CIBM in the third quarter.”

According to HSBC, “ Increases in short term interest rates will impact borrowers who have adjustable rate mortgages that are now resetting. In addition, further weakness in the housing market, lower consumption and lower employment also pose potential risk.”

Analysts predict that the bubble will burst when enough UK consumers report that IVAs are ‘ten times worse’ than bankruptcy, with the same financial difficulty attached, afterwards, but with five years of ‘living in hell’ before the debt is released.