Mortgage holders stretched to the limit

The Bank Of England has warned that half of all mortgages are stretching homeowners to the limit.

New figures from the Bank have revealed unprecedented numbers of borrowers are taking on commitments to dangerously high levels of debt in the rush to secure a cheap loan.

Fear

The fear is that, if interest rates start to rise, millions may fail to make ends meet.

The Bank’s figures show 47% of mortgages agreed in the third quarter of 2018 were what it terms ‘high loan to income multiples’.

Combined salary

This means that a couple with a combined salary of £40,000 are borrowing more than £120,000 – three times their income.

A single buyer on £30,000 a year could borrow four times what they earn – more than £120,000.

But experts say borrowing at this level could bring trouble if interest rates start to rise from their current historically low level.

Stretching

Justin Modray of Candid Money said: “If people are stretching themselves to get on the housing ladder now, it’s probably never going to be more affordable than this.

“But if we do see a spike in interest rates it could leave people struggling to afford their mortgages and rates are likely to go up.”

Danger

Financial journalist James Burton also pointed out the potential danger of buyers being lured by minimum deposit deals being offered by banks.

He said: “Banks are offering two-year fixed rate mortgages at a record-low average of 3.54% interest for customers with a deposit of just 5 per cent. At this rate, interest repayments on £190,000 over 25 years would be £955 a month.

Negative equity

“Such tiny deposits leave savers at risk of negative equity, because just a 5% fall in house prices would wipe out their entire stake.

“It is dangerous for the economy if large numbers of homeowners are in negative equity. If they are suddenly forced to sell, banks face huge losses.”

Critical

John Mann, a member of the House Of Commons Treasury Select Committee, was also critical.

He said: “It is irresponsible for banks to encourage hard-pressed borrowers to take out a mortgage they may struggle to repay.

“If interest rates go up – or if house prices fall – then there could be serious consequences for the economy.”