Home Buyers to spend HALF of take-home pay on their Mortgage

Economists said there is ‘no doubt’ that Bank of England interest rates will return to around 5 per cent - possibly even higher - from their current historic low of just 0.5 per cent.

If the current profit margins are maintained, it means mortgage rates will be pushed up to 8 per cent, according to Capital Economics.

It would see mortgage payments at the start of a new mortgage increase from 34 per cent of average take-home pay to 51 per cent for those buying a new home, it said.

It equates to more than £12,000 being spend on their annual mortgage repayments, as the figures are based on average take-pay home of £23,800 - or a gross salary of £31,500.

For existing borrowers – including those remortgaging – it will reach a record 42 per cent or £10,000.

Paul Diggle, an economist at Capital Economics, said: “The record level of outstanding mortgage debt relative to earnings suggests that existing mortgage borrowers would fare even worse relative to historical norms.

“And with the share of outstanding mortgages on variable rates of interest the highest in at least a decade, there is good reason to think that a sustained tightening in monetary policy would be passed on to borrowers quickly and in full.

“Were average mortgage interest rates for existing borrowers to reach 8 per cent, their average mortgage payments would rise to an all-time high of 42 per cent of take-home pay.

“Yet the additional interest rate risk that variable rates expose borrowers to can be overstated. The fact that most fixed rate periods in the UK are just two or three years long means that even most borrowers on fixed rates are exposed to a high degree of interest rate risk.”

However, he added the Bank Rate is likely to remain at its current level during this year and next.

“If that happens, it would no doubt add to the pressures on mortgage borrowers, but the house price correction that we expect over the coming years will be driven largely by the deteriorating labour market and the sheer unaffordability of housing,” he said.

It comes amid a rise in the number of people being evicted from their homes as lenders warn they will not be as tolerant about borrowers failing to keep up with their mortgage payments.

Earlier this month, the Council of Mortgage Lenders said 9,100 people had their homes repossessed during the first three months of 2011, up from 7,900 during the last three months of last year.

During the recession, lenders were told by the Government to use repossession only as last resort. But as the Government’s austerity measures take hold amid possible rises in interest rates, more home owners are expected to fail behind in their loan repayments.