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Mortgage affordability 'worsens'

11/12/2007

Mortgage affordability continued to worsen in October, according to the latest industry figures.

Interest payments on home-loans consumed the highest proportion of mortgage holders' incomes in over 15 years during the month, the Council of Mortgage Lenders (CML) confirmed today.

First-time buyers spent 20.6 per cent of their income servicing interest on their mortgages in October, up from 20.4 per cent in September - the highest level since 1991, the organisation revealed.

Amid rising house prices and following past interest rate rises, home-movers also spent more money on home-loan interest payments - typically spending 17.6 per cent of their income on mortgage interest in October.

The figure represents a slight rise on the 17.5 per cent spent by existing homeowners in September and the highest level since 1992.

However the CML said last week's quarter-point interest rate reduction by the Bank of England, which cut the UK's benchmark interest rate to 5.5 per cent, would provide some relief to borrowers over the coming months.

Meanwhile the expectation of further rate cuts may also lead to an increase in the number of homebuyers opting for variable rate home-loans, the trade organisation stressed.

The proportion of borrowers taking out fixed-rate mortgage deals has already dropped back – falling from 72 per cent in September to 68 per cent in October.

"For those customers coming to the end of their fixed rate mortgage in 2008, the potential impact of higher monthly payments will be diminished by the fall in bank rate this month and other rate reductions to come early in the new year," said CML director general, Michael Coogan.

Today's figures show lending volumes remained strong in October, totalling £33.5 billion over the month and representing a nine per cent rise on September.

However, the CML stressed the majority of the loans were likely to have been approved before the full impact of the global credit crunch and the problems associated with troubled lender Northern Rock took hold.

Amid growing evidence of a slowdown in the housing market, the organisation said it expected lending to become more "subdued" over the coming months – with recent falls in mortgage approval rates already indicating such a trend.