Recent rate cuts should ease affordability into 2008

While mortgage affordability deteriorated in 2007, the CML expects the two base rate reductions since December will help to ease debt servicing burdens into 2008.

Affordability for first-time-buyers worsened through 2007. By December first-time buyers typically contributed 20.7% of their income towards mortgage interest, compared with 17.9% in December 2006. The increase in typical income multiples for first-time buyers was slight by comparison: 3.38 in December 2007 compared with 3.34 in December the year before.

The growth in interest rate payments is due to successive base rate increases up to July 2007. However, the figures published today do not reflect the two recent reductions in base rates, or the expectations of future cuts, which will ease affordability constraints and the potential for payment shock.

Only 40% of first-time-buyer mortgages in 2007 were for properties under the £125,000 stamp duty threshold, compared with nearly 50% in 2006. This is an issue which the government can address by raising the threshold in the upcoming Budget.

A record proportion of borrowers (73%) took out fixed-rate mortgages in 2007 to ensure certainty in their future monthly payments. Take-up dropped towards the end of 2007 (64% in December compared with a peak of 77% in June and July) in anticipation of the base rate reductions.

Gross lending grew by 5% to £364 billion in 2007, from £345 billion in 2006. However, this almost entirely reflects growth in lending not accounted for by house purchase or remortgaging (primarily made up of further advances and buy-to-let).

Lending for house purchase declined in 2007, the number of loans fell by nearly 10% to one million, while the value eased by 2% to £155 billion. Loans for house purchase numbered 62,000 in December, down by 22% from 78,000 in November. It seems likely that this has been affected by a range of factors, including the new Home Information Pack arrangements.

Commenting on the data, CML director general Michael Coogan said: “The decline in lending appears to be driven more by funding constraints than lower consumer demand.

“Affordability has been stretched further in 2007 but the recent base rate cuts and the expectation of future cuts will ease debt servicing burdens in 2008. The impact of payment shock on the large numbers of borrowers coming to the end of fixed-rate mortgages will also be less than we anticipated last year.

“For first-time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses.”