Despite warnings of imminent difficulties in the face of the widely anticipated 0.25 per cent base rate rise next week, a comparative analysis of the market back in 1987 – when similar, overheating conditions prevailed – and 2007 by the online data comparison service shows that the danger points arise when the percentage of take home income needed to service mortgage interest rises to around 30 per cent.
In 1987 the typical mortgage advanced by lenders was £25,000, on an average income of £12,272*, working out to a multiple of 2.1 times income. Back then, the average borrower paid 17.9 per cent of income on mortgage interest.
Twenty years later average borrowing has risen to £118,500, while the borrower’s salary has leapt to £39,400, meaning an income multiple of 3.05. But because of historically low interest rates, mortgage interest repayments still only account for 15.6 per cent of salary.
“While the 20 year comparison figures paint a reasonably harmonious picture, it is when you look at 1989 – the year that the base rate leapt up to 14.875 per cent – that the calamitous problems beset the market,” said Moneynet.co.uk chief executive Richard Brown.
“Back in 1989 with rates nudging 15 per cent, the average borrower was having to allocate virtually a third of their salary to mortgage interest payments and this became just too onerous for many people’’.
However, for the same conditions to prevail today mortgage interest rates would need to approach 10 per cent before borrowers start to see such a large proportion of their salary going on mortgage interest - although other factors such as other consumer debt and the rising cost of living will obviously also play a part.
“While our research suggests that there are not – as many commentators currently insist – genuine comparisons with the market of 20 years ago because of the relatively low base rate, a further rate increase to 5.5 per cent is bound to slow the market, and the situation for first time buyers is looking more precarious.”
