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.

Home buyers need 40pc higher deposit

The average deposit reached 43 per cent in September, up from 30 per cent in December 2006.

It is a fresh blow to first-time buyers as it equates to £70,000, based on average house prices. This is almost three times the average salary and £20,000 more than the deposit required four years ago.

However, it is not the highest average deposit since records began four years ago. Levels reached 49 per cent in December 2008 as the credit crisis began to tighten its grip.

It comes after the Bank of England warned last week that banks are becoming even stricter about who they will lend money to amid fears that higher unemployment will lead to home owners defaulting on their loans.

The latest mortgage research by surveyors e.surv also found that not all buyers are being treated equally. Those buying cheaper properties are being squeezed the most, typically needing a 35 per cent deposit compared to 25 per cent four years ago. It means they can borrow 11 per cent less than previously.

By contrast, those buying properties worth at least £500,000 can borrow just 4 per cent less.

Richard Sexton, business development director of e.surv said: “Tighter loan to value criteria have hurt everybody, but those at the bottom of the ladder have been hit disproportionately.

“One in five borrowers wants to buy a home worth less than £125,000. They are the classic first-time buyers, but they are still trailing far behind wealthier home buyers in their access to finance.

“Those financing homes in the £500,000 price bracket are only around one twentieth of buyers. For them, it’s as if the credit crunch hardly happened. This is a concern as first-time buyer participation is central to any sustained recovery in house prices.”

It comes after property experts warned declining house prices are “inevitable” after Nationwide revealed its latest house price index last week.

It reported typical values rose 0.1 per cent in September to £166,757 compared with the previous month. But this was not enough to halt the drop in annual house price growth, which slid from 3.9 per cent in August compared with the previous year to 3.1 per cent in September.

Mr Sexton added: “House prices today are almost exactly at the same level as four years ago, but the size of deposit needed has risen £20,000 to buy a typical home.

“Lenders are nervous about the state of the economy and the future direction of house prices, and their ability to fund their mortgage lending is constrained by the demands from regulators to bolster their capital reserves.

That means only the best quality borrowers are offered loans, and on much tighter criteria than before.”