Housing affordability falls but should improve

London: Affordability for first-time buyers fell to a 16-year low last year, but recent cuts in interest rates should ease the pressure, the Council of Mortgage Lenders (CML) says.

First-time buyers typically paid 19.4 per cent of their income as mortgage interest in 2007, the highest since 1991 when it was 21.8 per cent.

The typical income multiples for first-time buyers - the amount borrowed relative to income to get on the housing market - hit a high of 3.36 times income, the highest level since the survey began in 1974.

Property affordability worsened throughout 2007, due to successive base rate increases up to July, the figures showed.

Strain

By December, the average first-time buyer contributed 20.7 per cent of their income towards mortgage interest, compared with 17.9 per cent the same month the previous year.

However, the CML said the data did not reflect two recent quarter-point cuts in the base rate, which should help to ease the pressure this year.

CML director-general Michael Coogan said: "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.

"For first-time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses.

"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."

A total 1.4 million people are likely to see their cheap, fixed-rate mortgage deals end in the early part of this year, and earlier estimates suggested they would be forced to pay an average of £200 per month more to meet the cost of servicing their home loans.

Overall, a record proportion of borrowers (73 per cent) took out fixed-rate mortgages in 2007. Take-up dropped towards the end of the year - to 64 per cent in December compared with a peak of 77 per cent in June and July - in anticipation of reductions in the base rate.

Gross lending totalled £364 billion in 2007, up five per cent on 2006. The CML said the rise reflected further advances and buy-to-let lending growth, as opposed to loans for house purchases or re-mortgages.

The number of loans taken out for house purchases fell almost 10 per cent to one million during the year.

"The decline in lending appears to be driven more by funding constraints than lower consumer demand," added Coogan.