Marketing and Communications Director at Oportfolio Louis Mason has been in the financial services industry since 2016
The mortgage market and property markets in the UK have experienced significant changes in recent years, influenced by a multitude of economic factors. Terms like “interest rate fluctuations,” “gilt yields,” and “cost of living pressures” are now being used in discussions of housing affordability and borrowing capacity. But what do all these trends mean for the ordinary borrower?
The UK Mortgage Market as it Stands!
I recently read about a young couple who purchased their first home in 2020. Mortgage rates were then quite low (I remember the good old days of 1% rates!), and lending multiples were also more restrained. They borrowed as much as they could, which was 4.75 times their combined income. Rates have gone up since then, and that has resulted in their monthly mortgage costs going way up.
Having worked in mortgages for almost 10-years, I’ve seen a noticeable increase in these kinds of client situations, where borrowers are balancing rising costs with the need for stable housing finance. And unfortunately they are going to keep on coming. One particular trend gaining attention is the introduction of mortgages allowing borrowing of six times income, a level that some lenders are now offering to address housing affordability.
Six Times Income Mortgages
From a cashflow perspective, higher borrowing multiples mean increased monthly repayments and fewer personal options for lenders. For example, someone earning £50,000 a year and who takes six times earnings may find mortgage payments of around nearly half or more of their net income if interest rates rise even more. This provides fewer choices for managing other essential expenses or unexpected financial mishaps.
Moreover, the higher leverage implies more risk to market volatility. When property values decline or personal circumstances reverse, e.g., job loss or sickness, that has little equity will struggle to roll over without dire financial consequences. Risks also prompt questions about not only how much one can borrow but also how will payments be affordable long-term.
It’s worth considering the general impact on the housing market. Increasing borrowing limits for all purchasers can cause house prices to rise, as demand is indirectly stimulated. That can make prices unaffordable, especially for first-time buyers and those on lower incomes, potentially pricing many out.
Potential for Market Instability?
Considering history, we know that lending behaviours unmoored to economic fundamentals have the potential to trigger market instability. The period in the lead-up to 2008 reminded us of the importance of avoiding high loan-to-value ratios underpinned by high multiples of borrowing. While lending systems these days have greater safeguarding, vigilance at all times is necessary to make sure the market remains stable.
Use a Mortgage Broker
At Oportfolio Mortgages, we are keen to help clients find lending options best suited to their financial conditions and general well-being. As natural demand for greater borrowing capacity exists, prudent risk management is necessary to protect individual borrowers and the wider marketplace. Affordability solutions to housing issues are multifaceted and will require concerted efforts across the board like increased supply of homes, policy measures for encouraging sustainable borrowing, and products with certainty and flexibility for clients.
My role is to inform current and potential clients of the ever changing mortgage market, and our roles as a mortgage brokerage is to guide clients through the intricacies in a way that they are properly informed to make choices. Borrowing responsibly and understanding how interest rates and other variables can influence one is crucial for financial health. Overall, while borrowing multiples and market conditions will continue to evolve, the emphasis remains on promoting prudent borrowing and lending behaviour that provides a viable and stable housing market. Call our team today to see how we can help.
