First-time buyer affordability measures “overly positive”
New research from the Council of Mortgage Lenders (CML) suggests why it has become harder for first-time buyers to enter the UK’s property market in recent years, despite the “sea-change” decrease in interest rates since the early 1990s.
Falling interest rates should mean a rise in the size of mortgage that can be serviced from first-time buyers’ incomes.
However, in the case of repayment mortgages, lower mortgage interest rates automatically mean higher capital payments.
Consequently, when mortgage rates were above 10% in the early 1990s, initial capital repayments were negligible but at today’s much lower rates, capital repayments can easily lift initial payments by 40% or more, the study states.
The research goes on to point out that most housing market affordability measures are actually based on mortgage interest payments and can therefore give an “overly positive picture” of the position of the first-time buyer.
Currently, capital and interest payments for a typical first-time buyer represent about 29% of take-home income and while the proportion is below recent highs, it is still marginally above the 30-year average.
The report therefore concludes that initial debt-service costs for those getting a foot on the property ladder “continue to look fairly elevated”.
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What concerns me is the first-time buyers who are borrowing their deposit, or a substantial part of it. That skews any affordability reports and leaves borrowers in a very vulnerable position.