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While mortgage affordability deteriorated in 2007, the CML (Council of Mortgage Lenders) expects the two base rate reductions since December will help ease debt servicing burdens into 2008.
Affordability for first-time-buyers worsened through 2007. By December they typically contributed 20.7% of their income towards mortgage interest, compared with 17.9% in December 2006. The increase in typical income multiples for first-time buyers was slight by comparison though: 3.38 in December 2007 compared with 3.34 in December the year before.
The growth in interest rate payments is due to successive base rate increases up to July 2007. However, the latest figures don't reflect the two recent reductions in base rates, or the expectations of future cuts, which will ease affordability constraints and the potential for payment shock.
The CML notes that only 40% of first-time-buyer mortgages in 2007 were for properties under the £125,000 stamp duty threshold, compared with nearly 50% in 2006. This is an issue it says the government can address by raising the threshold in the upcoming Budget.
Meanwhile, gross lending grew by 5% to £364 billion in 2007, from £345 billion in 2006. However, this almost entirely reflects growth in lending not accounted for by house purchase or remortgaging (primarily made up of further advances and buy-to-let).
Lending for house purchase declined in 2007 - the number of loans falling by nearly 10% to one million, while the value eased by 2% to £155 billion. And loans for house purchase numbered 62,000 in December, down by 22% from 78,000 in November - in part due to the new Home Information Pack arrangements.
Commenting on the data, CML director general Michael Coogan said: "The decline in lending appears to be driven more by funding constraints than lower consumer demand.
"Affordability has been stretched further in 2007 but the recent base rate cuts and the expectation of future cuts will ease debt servicing burdens in 2008. The impact of payment shock on the large numbers of borrowers coming to the end of fixed-rate mortgages will also be less than we anticipated last year.
Coogan adds that for first-time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses.
12 February 2008 © Moneyextra.com
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