Homeowners face ‘mortgage time bomb’ as repayment rise could take 80% of income

Soaring mortgage costs mean that homeowners across the UK could be paying as much as 80 percent of their household income on monthly repayments.

Mortgage rates have been rising following successive hikes to the Bank of England base rate over the past two years.

The pace of these mortgage hikes has started to slow, with many lenders now offering five-year home loans with less than five percent interest.

However, homeowners buckling under the weight of soaring mortgage rates are raiding their savings and cutting pension contributions as repayments are costing over half their income.

New research analysed regional salary, house price and mortgage calculation data to forecast how any further interest rate changes could impact affordability levels for residents across England. 

Based on the average fixed rate deal rising to 6.41 percent, homeowners in Oxford could be feeling the biggest pinch.

The desirable university city has topped a list of the most expensive places to live in the UK as ongoing interest rate hikes push the average cost of a fixed-rate deal to 6.41 percent. 

Just behind Oxford is Bath, where households can now expect to spend 77 percent of their income on mortgage costs, followed by London at just over 75 percent. 

The analysis, from conveyancing technology specialist Legal Bricks, part of Access Legal, is based on the average salary for a couple and house price in 100 UK towns and cities. 

The analysis warned against a “mortgage time bomb” for some homeowners as 80 percent of their income could be “swallowed up by mortgage costs”.

Nationally, a couple on a 6.41 percent fixed-rate deal could expect to pay around 42 percent of their salary on mortgage repayments with a joint pre-tax salary of £63,000 and a house worth around £297,000.

Unsurprisingly, the most expensive locations are in the South, while the most affordable are in the North.

In Oxford, house prices are almost double the national average at just under £600,000 yet a combined salary is only just above average at £66,618. 

With a 6.41 percent fixed-rate deal, householders in Oxford would need to earn eight times their joint salary to afford their current home, while those in Bath and London would have to earn 7.66 and 7.2 respectively.

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Given that lenders normally apply a 4.5 income multiplier, buyers in the most expensive locations could struggle to remortgage when their deal ends. 

Legal Bricks also uncovered the most affordable places to live in the UK – with Darlington coming top, followed by Hartlepool and Middlesborough. 

Even with a 6.41 percent mortgage deal, homeowners would typically spend less than 25 percent of their income on housing, and it drops to just over a quarter in Darlington. 

Property prices in the most affordable three locations are significantly lower than the national average – £153,505 in Darlington, £151,759 in Hartlepool, and £167,885 in Middlesbrough. 

Mike Connolly, director of Legal Bricks, an Access Legal company, said: “It’s difficult to believe that the average two-year fixed deal was just 2.34 percent in December 2021. Now homeowners are facing crippling mortgage costs – with some having to find an extra £1,000 a month, on top of higher food and energy costs. 

“Our analysis reflects the North-South divide in the housing market and while some areas are more affordable than others, households are still being squeezed. Demand for housing is still strong but it will be interesting to see how the nation adapts. Will they downsize, rent out rooms, or move to a town or city they hadn’t previously considered?”

Because the majority of mortgages in the UK are on two or five-year fixed rates, most will only feel the impact of higher interest costs when they come to remortgage. Even though rates are now falling, they are still likely to be much higher than many on fixed rates will currently be paying.  

Nearly one in five (18 percent) of homeowners have had to take money out of savings to make mortgage repayments last month month, according to a survey by accountants KPMG.

Some homeowners (16 percent) have switched their capital repayment mortgage to interest-only, which is cheaper in the short term as it means homeowners pay off just the interest on the loan.

However, it is far more expensive in the long term as interest continues to be charged on the entire balance – and homeowners will need a plan to repay the loan when the mortgage term ends. 

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