Half of pay will be spent on mortgage warn analysts

Posted on May 25th, 2011 | Categories - Mortgages

When interest rates rise mortgage payments will rocket.

Mortgage payments could surge if interest rates return to their normal level.

People buying a new home may be forced to spend over half of their take-home pay on their mortgage once interest rates rise, according to specialists.

The current 0.5% interest rate will return to around 5% in the coming years, which means mortgage rates could rise to 8%, experts at Capital Economics have warned.

For people buying a new house their mortgage repayments could rise by 17% to a massive 51% of their average take-home pay. This works out at about £12,000 a year for people on a gross salary of £31,500. For people who already have a mortgage the figure could reach 42%.

Paul Diggle, an economist at Capital Economics, said: “The record level of outstanding mortgage debt relative to earnings suggests that existing mortgage borrowers would fare even worse relative to historical norms. And with the share of outstanding mortgages on variable rates of interest the highest in at least a decade, there is good reason to think that a sustained tightening in monetary policy would be passed on to borrowers quickly and in full”.

He continued: “Were average mortgage interest rates for existing borrowers to reach 8 per cent, their average mortgage payments would rise to an all-time high of 42 per cent of take-home pay. Yet the additional interest rate risk that variable rates expose borrowers to can be overstated. The fact that most fixed rate periods in the UK are just two or three years long means that even most borrowers on fixed rates are exposed to a high degree of interest rate risk”.

He added that even though the rate is likely to remain steady for the next two years any changes will add to the existing pressure on mortgage borrowers.