What History Can Show US About Mortgage Affordability

With interest rates already at their highest level since 2008 and the ongoing fall-out from the new Chancellor’s mini-budget, Anna Green, a Mortgage Adviser at Progeny, says there has been increasing media attention on the impact on mortgage borrowing and affordability.

Even before the recent further tightening of the market, affordability analysis from Rightmove showed that due to historically low interest rates, average mortgage payments on properties with two-bedrooms or fewer have risen by 13% in the last ten years.

However, of equal note is the spiralling cost of renting, with rents growing at the fastest annual rate in 16 years according to Rightmove’s Rental Price Tracker Q2 2022 and equivalent rental payments on the same two-bedrooms-or-fewer properties have risen by a massive 40%.

Data on three bedroom homes paints a similar picture, with the biggest gap recorded between rental and home ownership payments since 2017 according to the 2021 Halifax Buying vs Renting Review.

In Scotland, Scottish First Minister Nicola Sturgeon has responded by announcing a rent freeze, effective from September 6, which stops public and private landlords raising rents until at least March 2023, but no such legislative moves are anticipated in the rest of the UK at this time.

Rise in tenants with a view to buying?

With some 20% of the UK population renting from a private landlord, according to data from Generation Rent, this is a significant issue. It could mean that despite borrowing gradually becoming more expensive, paradoxically, in a climate where average rent is increasing at a significantly faster rate, we could actually see a rise in first time buyers, keen to escape the increasingly costly rental market. Home ownership of course carries many other costs outside of mortgage borrowing, which all need to be factored into any meaningful cost comparisons but with rental costs increasing apace and no government intervention seemingly on the horizon outside of Scotland, this may result in tenants with ambitions to become homeowners exploring their options at this time.

A longer-term view on affordability

It’s worth noting that former tenants may arguably be better prepared, through their experience of soaring rents, for mortgage borrowing increases, based on the market analysis.

An issue that mortgage advisers can often struggle to truly bring home to clients is that in the 25 or even 30-year term of their mortgage, there is likely to be significant change to financial circumstances, both at a personal and individual level for the homebuyer themselves and at an economic level.

With the Bank of England base rate having been at historically low levels in recent years, it has been very hard for first-time buyers to imagine mortgage interest rates could ever rise to 5%, let alone any higher.
As well as telling the mortgage applicant everything about a chosen mortgage product, a mortgage illustration document includes a section detailing the highest interest rate in 20 years and the resulting monthly payment. It’s intended as a warning as to how much payments could fluctuate over the lifetime of the mortgage.

This means that advisers are currently showing clients payments for a mortgage rate of 11-12%, which it reached over this timescale, and it's important that buyers take note of what history can teach us.
Although mortgage rates are rising, they are still low compared to the 1990s and especially in relation to the 1980s, when the Bank of England base rate hit over 14%. Yet, recent research shows that a third of mortgage holders believe the interest rate hikes over the past year have made their mortgage repayments unaffordable.

None of us has a crystal ball but looking back over recent history provides us with valuable data that can inform our decisions today and help to provide perspective and context in periods of volatility and uncertainty. Whilst renters have been feeling the squeeze for some years, it looks like the cost of mortgage borrowing will continue to face a more uncertain period and therefore it is vital that homebuyers are prepared for some bumps and shocks along the term of their mortgage, which does include imagining what might seem unimaginable in the present time.