In Focus: Home ownership  

BoE rate rises to drive up share of income spent on mortgages

BoE rate rises to drive up share of income spent on mortgages

The share of household income spent on mortgage repayments is expected to increase by more than 3 per cent as a result of the latest Bank of England rate increase, research has shown.

The Bank of England’s latest base rate increase earlier this month means that the average household is likely to now spend 27.9 per cent of their income on their mortgage repayments.

The research by House Buyer Bureau analysed the impact base rate changes will have on the cost of repaying a mortgage. 

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It found that prior to the most recent 0.75 percentage point base rate rise, the average homebuyer with a variable rate mortgage had repayments of £1,399 a month based on a 5.10 per cent rate. 

With the average household income in England currently sat at £67,784, this means the average household was spending 24.8 per cent of their annual income on their mortgage.

As the base rate is now at 3 per cent, the average variable rate mortgage is forecast to climb to 6.34 per cent, pushing annual repayments up to £18,917 or 27.9 per cent of income.

House Buyer Bureau managing director, Chris Hodgkinson said while a 3.1 per cent increase in proportion of income spent on mortgage repayments may not seem like much, in reality it is a jump of over £2,000 per year for the average home.

Hodgkinson added that this was at a time when households are “already stretched to breaking point with the increased cost of living”.

“For many homebuyers, this increased cost is likely to be one hurdle too many when it comes to realising their dreams of homeownership and this will inevitably have an impact on the property market and house prices,” he said.

In Hodgkinson’s view this means that sellers will be forced to adjust their asking price or “spend months on end with little to no interest in their home”.

“Either way, we can expect the huge rates of house price growth seen in recent years to continue to fade over the coming months as the market adjusts to the new reality we have been presented with due to soaring interest rates,” he added.

At a regional level, households in Devon and Greater London are set to see the biggest jump in the proportion of household earnings spent on servicing mortgages, with an increase of 4.2 per cent.

Both counties are also the regions that require the highest proportion of income required to cover the cost of borrowing, at 37.5 per cent and 37.4 per cent respectively.

Earlier this month, a housing expert told FTAdviser that house prices can be expected to fall by 5 per cent in 2023, but that some markets will outperform others. 

Elsewhere in the mortgage market, lenders have begun decreasing rates marginally since the base rate rise, alleviating fears that rates will continue to rise indefinitely.