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Mortgage affordability peaks but experts warn rate rises loom

Home loan repayments have fallen to levels of affordability not seen since 1999, according to a study by Britain’s biggest mortgage lender.

The improvement, driven by new lows for mortgage rates, has tempted thousands of first-time buyers to tentatively step on to the property ladder.

However, experts have urged caution amid signs that rates on new mortgages may be about to head higher.

The Halifax Affordability Review shows mortgage payments accounted for 27pc of a new borrower’s disposable income between April and June this year, down from a peak of 48pc of income in the third quarter of 2007.

The bank said there have been significant improvements in affordability in all local authority districts across the UK since 2007.

However, mortgage brokers are warning that rates on new deals may have already bottomed out following sharp rises in borrowing costs on the markets that provide credit to lenders. Traders appear to be sceptical about the commitment to low rates made by Bank of England Governor Mark Carney.

Improved affordability and the Bank’s promise of low rates until 2016 appears to be supporting demand with a sharp rise in the number of first-time buyers. Figures from the Council of Mortgage Lenders showed this week that 25,300 loans were advanced to first-time buyers in June, up 30pc on a year earlier. Lending to first-time buyers is at its highest level since 2007.

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But sharp increases in the cost of borrowing could leave some buyers struggling with repayments and put house prices under pressure.

Jason Witcombe, a financial planner at Evolve Financial Planners, said: "The inevitable rise of interest rates is a real problem waiting to happen. A lot of people are on the cusp of being unable to afford their mortgage repayments and it won't take much to push them over the edge."

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The Halifax study showed a clear north-south divide, with mortgage payments at their lowest as a proportion of earnings in Northern Ireland, where new borrowers paid an average of 17pc of income. In Scotland new borrowers paid 19pc, in Yorkshire and the Humber the proportion was 22pc and 23pc in the North West.

Payments are highest in relation to earnings in Greater London, where borrowers paid 36pc of their income towards their mortgage. Borrowers in the South East paid 34pc and in the South West the figure was 32pc.

Halifax said lower house prices, although values have recovered from their 2008 lows, and reduced mortgage rates have been the main drivers behind the improvement in affordability.

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Craig McKinlay, mortgage director at Halifax, said: "The favourable mortgage affordability position is a boost for both those who already have a mortgage and those who are able to raise the required deposit to buy a home. Improved mortgage affordability has been a key factor supporting housing demand and is helping to stimulate the modest recovery that we are currently seeing.”

Lenders have busily cut mortgage rates this year, helped by the launch of the Funding for Lending Scheme (FLS) a year ago, which has given them access to cheap credit. Competition among lenders for customers has been fierce, particularly in the two and five-year fixed rate space with the lowest rates, offered by West Bromwich and HSBC, now below 1.5pc.

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However, some commentators have warned Government intervention from the FLS and also the Help to Buy scheme, which will guarantee billions of pounds-worth of mortgages, could be creating a fresh bubble in the housing market by giving more people access to credit they otherwise would not be able to afford.

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Last week, Mr Carney said monetary policy would be tied to unemployment and indicated that the Bank Rate would therefore stay at 0.5pc until 2016. One of the aims was to encourage lenders to offer more low-rate mortgages.

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However, inter-bank borrowing markets have been pricing in a greater chance of a rate rise. Swaps have risen sharply in recent weeks.

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Brokers are now warning mortgage rates are likely to rise in response and are urging borrowers to lock-in today’s low fixed-rate deals.

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Ray Boulger of John Charcol said: "I can see no point in borrowers waiting for rates to fall further. Swap rates are rising and Mark Carney's attempt to engineer low rates over the medium term has clearly failed. There is no indication mortgage rates are going to suddenly shoot up, but they certainly will rise."

Mr Boulger said borrowers should consider fixing their mortgage repayments over the longer-term so they don’t struggle to meet their repayments when rates rise.

Mr Boulger added: "If rates go up slowly it won’t be too difficult for borrowers to adjust. However, if they rise quickly some borrowers will be hit hard, particularly those on short-term deals. The more people that take out longer term fixes the better, as they will be more insulated from rate rises."

Ten most affordable local area in Q2, 2013

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Local Authority District
Mortgage payments as % of disposable earnings
East Ayrshire
Northern Ireland
West Dunbartonshire
Northern Ireland
North West
North Lanarkshire
Glasgow City
North Ayrshire

Ten least affordable local areas in Q2, 2013

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buy a second property with my brother for letting proposes.

Local Authority District
Mortgage payments as % of disposable earnings
South East
Hammersmith and Fulham
South East
South East
South West


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