Drawing upon data from 2006/07 to compare changes in mortgage type, income multiples and loan to value, Charcol has highlighted the evolving picture of the average UK borrower.
Tightening criteria over the past 18-24 months has undoubtedly had a big impact on the way Britons borrow.
Income multiples had crept up to 3.11 for the 'average' borrower and 3.5 times first-time buyer income prior to the 'credit crunch' however since the impact rippled out into the markets, this has been significantly reined in to mitigate against risk.
Tighter times have also pushed borrowers towards interest-only mortgages.
When interest rates peaked at 5.75 per cent in 2007 the number of interest-only mortgages was at its highest at 49 per cent, dropping back to 40 per cent by the end of the year.
This might be a viable short-term solution, but Katie Tucker of John Charcol warned: “It is vital now that the borrowers who went interest-only to help their affordability in 2006 or 2007 revert back to capital repayment, or overpay accordingly, as interest rates have started to reduce.”
The proportion of borrowers taking out fixed rates is known to be high, but the rise and fall of their popularity is more transparent than some may think.
At the beginning of 2006, fixed rate mortgages accounted for 42 per cent of the lending spectrum, rising to 69 per cent at the start of 2007 as future rate hikes became a certainty. This has now fallen back to 33 per cent as rates are trimmed by the Monetary Policy Committee (MPC).
Additionally, whilst purchase loan to value ratios remained largely static throughout 2007, remortgage loan to values took a significant downturn in the second half of the year.
Tucker explained: “This drop implies that buyers continued to borrow as much as they could based on their income and a finite deposit. Remortgagers, however, normally see their debt reduce in relation to their property value, so loan-to-value ratios are typically kept high by those who are raising capital to consolidate debts, or use as a deposit for another property.
"It is not surprising that existing homeowners, faced only with the higher remortgage rates than they are used to budgeting for, and prospects of decreasing value of their property, would be hesitant to take equity out at this time for other projects.”
Going forward, Tucker predicts a more savvy first-time buyer due to the financial constraints they have become bound by: “From the data gathered in January, it’s already obvious that first-time buyers are going to be the group to watch in 2008.
"Affordability is key here, and the scarcity of 100 per cent-plus mortgages combined with consumer fear of negative equity in the current property market has brought the average loan to value down considerably as many first-time buyers with little or no deposit, have stopped to think again.
"Property values would need to fall far enough that starter homes become bargains, at the same time as interest rates fall, before first-time buyers can afford to buy comfortably again. ”
