Across generations there is a clear divide. Experian’s Financial Strategy Segments (FSS) tool shows that, for several groups of the population, there’s a strong link between life stage and affluence level. Typically, a series of events sees an individual passing through life and rising in affluence and assets over time. By knowing where people are in terms of their life stage and affluence level, as well as where they are most likely to end up, you have a sound framework on which to base business and policy decisions.
Overall, older households are better protected against the negative impact of rising interest rates as they typically have large savings and lower mortgage values. According to our research, on average this group expect to be debt – and mortgage – free in the next five years from now. Most have over £10,000 in savings and 21% have over £100,000. However, when you compare this to the broader UK society (which shows how 11.5 million Brits have less than £100 in savings) the much-reported divide becomes more apparent.
Credit demand is changing
When you look at the credit demand trends what we also see is more demand for high value loans, but early arrears on those loans are increasing significantly. We also see more revolving credit card balances – especially prevalent on those with a credit limit between £1500 and £2500. With over 3 million consumers unable to pay their debts when they become due (according to the Peter Wyman report: Independent Review of the Funding of Debt Advice – 2018), and nearly 9 million people in the UK using credit just to cover their everyday living expenses – you can start to see how, as a society, financial stability is starting to erode. It’s important to note too how these trends don’t exclude the older generations. In fact, we are seeing more demand (particularly for mortgages) from this group. The reasons for this will vary, for some it may be to support family members, for others it will be a desire to free up monies which allow for more recreational spending throughout retirement – plus, of course many reasons. In our research we can see a more relaxed attitude to spending as this age group also opt for ‘living in the now’ and spending money on experiences as opposed to saving funds for essentials which was the trend three years ago.
Younger households save less (the majority of millennials have less than £100) and, having bought their first home at an average age of 29, are more likely to have a bigger mortgage balance which is a consequence of rising housing costs, but also a shorter lending term on the mortgage. Unsurprisingly, this is expected to be one of the groups that lose out from an increase in rates – but, as per above, this isn’t inclusive only to Millennials. More than half of the demographic groups that make up society today would be squeezed facing a rise – some, of course, more significantly than others.
Should interest rates rise to above 2% we could see more people vulnerable financially. (read more on vulnerability in the Bank of England’s views here)
The erosion of a generation gap
This growing generation wealth gap has been well documented for some time: final-salary pensions, high house-price inflation and periods of economic growth have all worked in the favour of an older group, leaving them with substantial assets and property. By contrast, those currently in their 20s and early 30s are faced with high house prices, low wage growth, the repayment of student loans and the continuing cost of renting and everyday living.
There are implications for both public policy and for financial services providers. The changing consumer landscape will mean fewer mortgages are needed, fewer retired people will release housing equity, and those nearing retirements will have less to spend on holidays and leisure. By being aware of these trends, you can plan for such changing needs and market products to the people most likely to need them, and afford them. You also have an important opportunity to help people make better financial choices now and be better prepared for the future.