Fears yet more rate rises could prompt a property market collapse are well wide of the mark, according to Moneynet.
The finance product provider says mortgage rates would need to jump 10% before there would be any serious threat of a collapse.
Moneynet says despite the potential difficulties of a widely anticipated 0.25% base rate rise next week, a comparative look at the market in 1987 – when similar, overheating conditions prevailed – and 2007 shows danger points only arise when the percentage of income needed to pay the mortgage hits 30%.
According to statistics from the Council of Mortgage Lenders, in 1987 the typical mortgage advanced by lenders was £25,000, on an average income of £12,272. This worked out to a multiple of 2.1 times income. In 1987, the average borrower paid 17.9% of income on mortgage interest.
Twenty years later average borrowing has risen to £118,500, while the borrower’s salary has leapt to £39,400, meaning an income multiple of 3.05. However, because of historically low interest rates, mortgage interest repayments still only account for 15.6% of salary.
Richard Brown, Moneynet chief executive, says: “While the 20 year comparison figures paint a reasonably harmonious picture, it is when you look at 1989 – the year that the base rate leapt up to 14.875 per cent – that the calamitous problems beset the market.
“Back in 1989 with rates nudging 15%, the average borrower was having to allocate virtually a third of their salary to mortgage interest payments and this became just too onerous for many people.”
However, Moneynet says for the same conditions to prevail today mortgage interest rates would need to approach 10% before borrowers start to see such a large proportion of their salary going on mortgage interest - although other factors such as other consumer debt and the rising cost of living will obviously also play a part.
“While our research suggests that there are not – as many commentators currently insist – genuine comparisons with the market of 20 years ago because of the relatively low base rate, a further rate increase to 5.5% is bound to slow the market, and the situation for first time buyers is looking more precarious,” he says.
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