Homeloans misery looms

By SIMON LAMBERT, THIS IS MONEY PUBLISHER
Updated: 02:48 EST, 20 July 2006

THE number of people struggling to pay their mortgage would hit the highest level for 15 years if a potential rise in interest rates arrives.

A report released today by lender Cheltenham and Gloucester said that a 0.25% rise in the Bank of England base rate would stretch housing affordability to its furthest point since 1991.

A buyer purchasing an average property with a 20% deposit could expect to spend almost half of their take-home pay on their mortgage interest payments alone according to the research.

The huge jump in house prices over the past decade would mean that the 49.78% proportion of an average homebuyer's salary going on their interest payments would be the highest share of wages set aside for homeloans since the days of 10% or higher interest rates.

Experts have widely predicted an imminent increase in the base rate, and the release of inflation figures yesterday showing the cost of living spiralling to 2.5% - considerably higher than the Bank of England's 2% target - is likely to bring forward an upward shift.

C&G said the hike in rates would push average monthly mortgage payments up to £854 from £795. It added that even if interest rates did not rise, affordability was still set to worsen during the final three months of the year.

Interest payments would take up 47.91% of take-home pay if house price growth continue to outstrip earnings growth as predicted.

This would come despite affordability improving slightly during the first three months of the year. Jon Pain, managing director of Cheltenham & Gloucester, said: 'Despite the improvement in the index in the first quarter, affordability is likely to get significantly worse later in the year if, as widely predicted, interest rates rise in the fourth quarter.

'This would clearly be something of a blow to buyers, but it does emphasise how important it is that borrowers take into account all costs when seeking a mortgage.'

Affordability remains best in Scotland, with buyers spending an average of just 35.5% of their take-home pay on interest repayments there, although it was the only region to see affordability worsen during the first quarter of the year.

At the other end of the scale the South East is the least affordable region, with interest payments taking up an average of 55.95% of take-home pay, followed by the South West at 53.44%, the East at 51.75% and London at 51.05%.

News that affordability is set to be stretched to the furthest level for 15 years follows reports this week that if house prices continue to rise at the current rate, the average home will cost almost £300,000 by 2011. The National Housing Federation, which represents housing associations in England, warned that first-time buyers were already in crisis and their problems were likely to mount considerably over the next five years.