The CML has said homebuyers are stretching their finances by selecting mortgage terms of greater than 25 years to afford their homes.
Data from the Council of Mortgage Lenders (CML) shows that 58% of first time buyers take out a loan lasting more than 25 years compared to the 2007 peak when the figure was 42%.
Other types of buyers are similar with 36% of home movers extending their mortgage up from 18% before the property market crash and 18% of remortgage buyers compared to 8% back in 2007.
The CML report says that pension freedoms and people living longer may influence longer mortgage terms, the main reason is homebuyers stretching to get on the property ladder.
Measures to restrict borrowing
The CML has also said mortgage affordability has seen an increasing number of borrowers with income multiples of greater than 4.5 times.
Their chief economist has said there is a potential problem building under the noses of the Bank of England’s Financial Policy Committee (FPC).
In 2014 the macro-prudential regulator established two rules relating requiring lenders to check borrowers can afford their mortgage payments should bank rates move 3% higher during the first five years.
In addition no more than 155 of lender business should be placed where income multiples are 4.5 times or higher.
According to the FPC these approaches were designed to counter the perceived risks to financial stability that could arise from household indebtedness and in line with the Bank of England’s recommendation to limit upward income stretch.
The good news is help with the deposit for a new home can come from family members as the equity release mortgage buyer can access cash and gift to a child or grandchild.
Mortgage income multiples increasing
CML’s chief economist, Bob Pannell said lenders had started to reduce the proportion of high income multiples after the peak of mid-2014 when 10% of all mortgages exceeded 4.5 time income.
This does not apply to buy-to-let landlords as they must have a 25% deposit and show the rental income can exceed 125% of the mortgage interest.
By the second quarter of 2015 it has reduced to 7.0% for all mortgages of which first time buyers were at 9.0%, home movers 8.3% and remortgage buyers the lowest at 4.0%.
However, this has changed considerably in the past six months and the incidence of high income multiple lending has increased sharply.
Mr Pannell has said that initially the lenders had a ‘knee-jerk’ reaction to the rules and the recent increase of income multiples was unwinding this position although now the proportion of lending is increasing from multiples of 3.5 times and higher.
The increase in the payment terms is evidence of pressures intensifying with 60% of first time buyers mortgage loans with terms of more than 25 years.
For remortgage buyers at the end of your mortgage deal it is likely you will not need to extend the term as switching to a preferential rate will reduce your monthly repayment costs.
This is now double compared to a decade ago and the median number of mortgages for first time buyers has seen the term lengthen from 25 to 30 years in just a few years.
If house prices continue to rise, this pressure on longer terms and higher multiples will continue.
What are your next steps?
Speak to our LCM mortgage advisers if you are planning to move home, buying your first home, remortgaging your existing home to a new cost effective mortgage deal or are a buy-to-let investor.
For equity release buyers our London City Mortgage brokers can recommend lifetime mortgages allowing you to receive cash from your property to improve your quality of life as costs rise.
Learn more by using the mortgage cost calculators, equity release calculator and property value tracker chart. Start with a free mortgage quote or call us and we can take your details.
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