‘A warning shot across the bows’: mortgage debt to income ratio at 101 per cent
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As mortgage debt reaches over 100 per cent of household income, consumer credit spirals with debters forced to sell up as deadlines draw near
New data from the Bank of England’s Financial Stability Report released on June 27 reveals that the average household debt to income ratio is 135 per cent, with mortgage debt accounting for 101 per cent of the total. With 10.3 per cent growth, consumer credit has outpaced the growth of incomes.
The figures are slightly down on pre-financial crash numbers. Mortgages made up 104 per cent of household income in 2006, whilst owner occupied mortgages have fallen from 95 to 84 per cent.
However, loan approvals have fallen from 119,045 to just 64,645, with transactions down from nearly 140,000 to just under 100,000.
The averages for advances to both first time buyers and buy to let purchasers have also fallen over the last decade, with advances to home movers more than halving from 59,342 to 25,700 as the market struggles sluggishly on in uncertain political times.
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Colin Payne, associate director at Chapelgate Private Finance believes that both ends of the spectrum should keep an eye on mortgage rates. “I wouldn’t be too concerned about the impact on mortgages in the short term,” he says.
“However, you can certainly take this as a ‘warning shot across the bows’ for both lenders and borrowers.”
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Despite having the highest employment rate since 1971 (74.8 per cent), wage growth has slowed in the three months to April according to the Centre for Economic and Business Research, with pay growth at its lowest level since October 2014.
With weekly growth of just 1.7 per cent and consumer price inflation at 2.7 per cent, real wages have fallen for the fifth consecutive month, meaning household income has slowed in relation to the rate of inflation.
In response, consumer credit increased by 10.3 per cent or £1.5 billion in April, prompting fears about rising levels of unsecured lending to allow people to pay off their mortgages. The Bank of England will be forcing banks to hold more capital in light of the increase, and will bring forward its annual stress test on banks to September.
First time unlucky
Advances to first time buyers were 25,400 as of the latest Bank of England figures, down from the 33,567 seen in 2006. Although average national debt is £10,048 according to L&C mortgages, when you factor in overdrafts, student loans and credit cards, the average for those aged between 18 and 34 hits £12,992.
Household debt at such high levels means that, taking in additional debt on top of a mortgage, it’s a tough time to be a first time buyer.
In some more sanguine news for first time buyers, the rate of house price growth has slowed to -0.2 per cent from growth of 2.2 per cent in 2006 according to the Bank of England.
“I think affordability for most is still more than acceptable. According to the ONS, first time buyers borrowed on average 3.58 times their salary when purchasing in London last year and mortgage payments are well below a third of borrower’s net pay,” said Mr Payne.
“This is likely to remain the case for some time even when interest rates do start to increase, which will likely be fairly measured.
“That said, my concern in the medium term, and no doubt that of the Bank of England, is that most borrowers or new first time buyers have no recollection of higher interest rates. 10 years ago two year fixed rates were over 5 per cent and that wasn’t far off the historical norm, we are still and will continue to be in the short term in a period of ultra low interest rates so the Bank of England is rightly concerned of the impact on borrowers when rates do start to normalise, hence this warning shot.”
Forced to sell
Equity release referral service Key Partnership have warned that homeowners are being forced to sell their homes to meet interest-only mortgage repayment debts, a trend confirmed by 43 per cent of estate agents questioned.
73 per cent of downsizers are older people trying to free up cash to pay of their mortgage. However, with house prices cooling off, the returns might be less than expected.
Will Hale, director at Key Partnerships, said: “Selling up to pay off an interest-only mortgage can make financial sense but it is worrying if older homeowners are being forced to sell and are not aware of all their options.
“Equity release enables people to stay in their home and not have to downsize, or even in extreme cases lose their house. Some lenders are engaging with equity release as a solution and we would urge others to follow.”
Scraping the barrel
L&C Mortgages has revealed that 2.2 million households think their repayments are too high, and 4.2 per cent can’t see themselves paying off their mortgage. The average household expects to pay off their current mortgage in 13 years, with Londoners facing a 16 year wait.
As a result, 2.54 million have had to cut back their spending elsewhere to afford their repayments.
David Hollingworth from L&C Mortgages said: “The fact that people have been making cuts in order to cover mortgage payments indicates how people feel they are ‘just about managing’ in many aspects of their lives.
“We know that British households last year ran down their savings to a record low and that the cost of basics such as energy and the weekly shop are continuing to rise – so it’s no wonder that people are feeling the pressure when it comes to their monthly mortgage payments. The problem is that although people feel they are struggling, they are not taking steps to manage their mortgage.”
L&C suggests that over half have never remortgaged to get a better deal, with 36 per cent on a Standard Variable Rate mortgage which leaves consumers vulnerable to interest rate fluctuations.
“Whilst the Monetary Policy Committee (MPC) was split on interest rates this month, both the Governer, Mark Carney, and Deputy Governor, Sir Jon Cunliffe have both said now is not the time to raise interest rates,” said Mr Payne.
“Inflation is clearly a concern but the impact of higher interest rates at this time is more so, and with commodities such as oil dropping in price recently you may well see the MPC sticking to the current level of interest rates for some time yet.”
Should interest rates rise, the impact will not be immediate for existing borrowers on fixed rates, but for those coming to the end of their terms, the question is when, not if. The question for those taking out a new mortgage, will be the length of the fixed term.
“With interest rates continuing at record lows and with numerous 5 year fixed rates priced below 2 per cent securing a rate for the medium term may be sensible, although clearly dependent on individual circumstances.”
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