Can you afford a 36% mortgage hike? (For once renters may be better off)
After enjoying years of a windfall driven by low interest rates, the UK’s heavily-mortgaged consumers are in for a rude awakening in the coming years. The pendulum could be set to swing firmly in favour of renters.
My eye was drawn to some stark, but not altogether surprising, statistics that were hidden away in the files backing the recent Spring Statement by Chancellor of the Exchequer Philip Hammond.
As a general rule, the notes and backing documents are almost always where the more interesting nuggets can be found. Look for what they don’t want to tell you, not what they do.
Declining mortgage payments
In the five years to the end of the 2017/18 financial year, average mortgage interest payments are estimated to have declined by around 6% nationwide, according to the Office for Budget Responsibility, the government’s official forecaster.
This reduction would have been greater were it not for the fact that house prices have risen so much over the period, raising the amount of debt needed to buy a house (mortgage interest payments are a combination of the amount of debt and the interest rate on that debt).
Over the same period, average earnings have increased by over 12% in total, or just over 2% a year. Although this may seem mediocre by any normal standards, it has provided a windfall for homeowners. They have seen their average earnings grow by around 18% more than their mortgage costs.
Renters, however, have not been so lucky. Average rents have increased by around 10% over the five years. With rents increasing at almost the same pace as earnings, it’s been harder to save.
For would-be house buyers, this problem has been compounded by a 33% increase in average house prices over the period – and the need for a deposit that is 33% larger.
The haves have gained while the have-nots have struggled. With homeownership increasing with age, the young have lost out to the old. This is before we even get started on 6% interest rates on £50,000 student loans…
But the pendulum could be about to swing swiftly and firmly in favour of renters.
Could the tide be turning?
The Office for Budget Responsibility, which provides the forecasts on which Philip Hammond makes his decisions, is predicting an intimidating 36% increase in mortgage interest payments over the next five years as interest rates rise. Wages are predicted to rise by 14%.
Homeowners’ finances are set to come under pressure and their entire windfall of the past five years is forecast to be eliminated. The risks to consumer spending cannot be ignored as this tailwind turns into a headwind.
In contrast, rents are forecast to rise by only 12%, 2% less than earnings. This fundamental situation for tenants may not be markedly different to the previous five years but the immediate future looks better for them than for indebted homeowners.
For a change, they may get to feel smug at dinner parties.
However, for those who have their hearts set on a house purchase, that dream will continue to prove a challenge to realise. House prices are predicted to rise another 14% over this period. The ability to save may be improving but the size of the deposit needed is also stretching away.
The forecasts included should not be relied upon, and are not guaranteed.
Source: Office for Budget Responsibility, Schroders.
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