Income Gearing

Definition of Income Gearing – this is the percentage of Post tax profits that are spent on obligatory debt interest payments

Household Income Gearing – The Bank of England measure obligatory payments by households on paying interest and other regular repayments on debt. This is calculated as a proportion of post-tax income.

What Factors influence Income Gearing?

1. Rate of Interest. A rise in bank interest rates will increase the cost of obligatory debt interest payments. The highest income gearing occurred in the late 1980s when interest rates rose to 15%. This rise in interest rates particularly affects those with large variable mortgages
2. Amount of Debt. High levels of indebtedness increase the amount of debt interest, even at low-interest rates. The high gearing in 2008, was not due to high interest rates but high borrowing and a fall in the savings rate to close to 0%.
3. Confidence. If consumers are confident about the future, they will take on more debt and be willing to devote a higher % of their income to debt repayments.
4. House prices. A rise in house prices encourages householders to remortgage their house and devote a higher % of their income to interest payment
5. Fall in Income. A fall in income (such as unemployment) would increase the debt burden for households. As fixed debt interest payments would now take a bigger % of income.