Zombie households refer to homeowners who are in debt and who have seen the value of their homes and savings fall. Yet, they are saved from bankruptcy and reposession because the interest rates on their mortagages are so low.
However, if interest rates move back up to normal levels, it is possible that these individuals will not be able to service their debt.
Example
Britain may face a long and difficult road to recovery because of an earlier housing and credit boom has led to a generation of “zombie households” among low-income groups who cannot save enough to ever repay their debts and begin spending again, according to a study conducted by the National Institute for Economic and Social Research in 2012.
According to data from the Financial Services Authority (FSA), over 40 per cent of mortgages generated in the years before the boom are interest-only and those borrowers are no further towards repaying their debts than they were five years ago.
The FSA also estimates that between 5 to 8 per cent of all mortgages are only avoiding foreclosure because banks are showing “forbearance.”
The Office for Budget Responsibility and the Bank of England have remained broadly unconcerned about the level of household debt because it overwhelmingly was used to purchase housing, giving households a financial asset that offsets the debt.
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