First-time buyers

15 year high in proportion to income spent on mortgage interest payments

First-time buyers are spending a higher proportion of their income on mortgage interest payments than at any time in the last 15 years.

The latest research from the Council of Mortgage Lenders showed that first-time buyers spent an average of 18.7 per cent of their income on mortgage interest in April - the highest level since 1992 - following a series of rate rises.

This figure rose from 18.3 per cent in March and is significantly higher than April 2006, when mortgage interest payments typically accounted for 16.3 per cent of salary.

In the first quarter of 1992, when property prices began to stabilise following the crash of the late 1980s, the average first-time buyer was also spending 18.7 per cent of their salary on mortgage interest.

There is, however, still some way to go before affordability constraints hit levels seen at the peak of the housing market crash; in the third quarter of 1990, mortgage interest payments hit an all-time high of 28.1 per cent of gross earnings.

It is estimated that interest rates would have to reach 7.4 per cent before affordability levels returned to those levels. However, some economists argue that capital repayment should also be taken into account. On this basis the debt burden is almost at 1990 levels.

The CML expects affordability to grow even tighter for mortgage holders in the coming months.

The CML's research also showed that average income multiples - the size of mortgage loans compared with earnings - hit a record high of 3.33 times in April. This has been creeping up over the last two years as lenders have relaxed their criteria.

Meanwhile the number of first-time buyers has slowed. In April 29,000 loans were provided for first-time buyers, compared with 30,800 the year before and 31,600 in April 2005.

It is not just first-time buyers feeling the pinch. People moving home spent an average of 16.3 per cent of their income on mortgage interest in April, also the highest level since 1992.

The Royal Institution of Chartered Surveyors said some comfort could be taken from the fact that the recent rate rises had been well flagged. It was the sudden rise of interest rates in the late 1980s that took the market by surprise and caused residential property prices to come off. From May 1988, rates rose from 7.38 per cent to 14.88 per cent in just 17 months.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Your home may be repossessed if you do not keep up repayments on your mortgage.

Article date: 07.07