The affordability of mortgage repayments is once again under the spotlight following recent comments by the Governor of the Bank of England that “gradual and limited” increases in interest rates are “coming nearer”. Mark Carney’s comments, coupled with the FCA guidance around interest rate stress tests, provide the strongest hint yet improvements in economic growth and unemployment levels would soon allow the base rate to rise from its historic low of 0.5%.
With the majority of UK households yet to feel the benefits of the upturn as growth in income remains weak, the impact of any increase would be very keenly felt. But such comments do little to deter the optimism of prospective homebuyers, many of whom still significantly overestimate the level of mortgage they will be able to repay.
We recently spoke to 1,500 house hunters with their sights set on homes typically worth £235,000. The same sample reported average household incomes of £50,674 and the ability to pay £780 a month towards a mortgage.
Assuming a 10% deposit, repayments on a £235,000 property are already closer to £1,300 a month. This figure that would rise to around £1,440 a month should interest rates increase by a further 1.5%.
The prospective mortgage applicants we spoke to are potentially underestimating their repayments by as much as £500 a month. While such an affordability gap might be reduced for the duration of an initial discounted rate, aspirations for homes of this value seem ambitious given the longer term realities the mortgage market faces, and the fact that more than a third of those we spoke to said they would find it hard to make ends meet if their mortgages became more expensive.
With such a significant gap in homebuyers’ awareness of long term affordability it is clear that we all have a role to play in ensuring that new borrowers do not cripple themselves financially by taking on more than they can afford.
We have responded to changes in regulation and market reality by introducing new sources of information and analytical models to improve customer income assessment and more accurately identify a true level of disposable income as well as performing interest rate stress tests.
Using these new sources of Experian data alongside our comprehensive overview of financial commitments you can quickly and confidently ensure responsible lending and meet required conduct risk standards when dealing with new applicants.
The same tools will also enable you to respond quickly and appropriately to support your existing customers whose circumstances will be severely tested by an increase in their variable rate.
Please take a couple of minutes to watch our new animated video to see a typical affordability assessment in action.