Are we heading into a mortgage catastrophe?

There have been comments flying around recently, most notably on social media, that current mortgage rates are still significantly lower than the 15% rates we saw in this country in the 1980s.

According to the BBC, the average interest rate on a 2-year fixed mortgage now stands at around 6%. The rates will be much higher for borrowers coming out of their fixed rate deals and being forced onto standard variable rates. But still not close to the 15% mentioned above.

However, you have to put this into perspective. There are a few key differences to think about between the 1980s and now, not least including:

1 – House prices used to be much lower in the 1980s

According to the ONS, the average house price in the UK was only around ￡30k at that time, vs over ￡300k now. So, houses now cost 10 times more than they used to.

2 – Salaries haven’t risen by as much as house prices

Based on ONS data that I could find, the average salary in the UK used to be around ￡6,000 back then, compared to around ￡30,000 now. So, salaries are only 5 times higher than they used to be in the 80s.?

This means the average homebuyer now is taking on significantly more borrowing than they would have done previously. On a 90% mortgage that’s an average salary multiplier of 9x now, vs 4.5x in the 80s.

3 – Government benefits used to cover mortgage interest

If a homebuyer got into trouble and couldn’t afford their mortgage payments, the government used to pretty much guarantee the interest payments through the benefits regime at the time. This is no longer the case, meaning borrowers facing payment difficulties now are more likely to face eviction.

There’s also the cost-of-living crisis to think about in the current economic climate. With energy prices climbing through the roof and inflation soaring, the government can barely do enough to help people deciding whether to heat or eat. ?Meaning, borrowers today have significantly higher costs to think about and feel poorer overall.

What does this all mean practically?

Since house prices have risen twice as fast as income, every percentage increase in mortgage rates today devours more than twice as much income as it used to.

In the figure below, you can see that the monthly payments on a 6% mortgage today actually devour almost the same amount of gross income as a 15% mortgage in the 80s! Income tax was also lower back then too, meaning on a net basis the result may be even closer. And according to many analysts, the worst rate rises are yet to come.

Concluding thoughts

Frankly, I think it’s insane for government to allow lenders to trap people into 30-year debts with no cap on what the repayments might end up as. We need to be real and understand that most everyday buyers can’t look past the fixed rate deal they are being offered, and don’t truly understand what future macroeconomic changes could mean for their mortgage.

It’s important to be clear and fair to customers, and to help them understand every eventuality. That’s why we give our customers a clear upper bound on our Primary Finance Home Provision Scheme, and clearly explain the worst-case scenario up front.

Mercifully, universal credit still covers rent. So if customers of our Home Provision Scheme ever find themselves without an income – they know they’re still covered. ?Remember, if our offering was created like a mortgage, government benefits would not cover it in times of financial difficulties. On top of that, one of the benefits a PF customer has is knowing that they can utilise their equity instead of rent if they ever find themselves in such difficulties. We’ve worked out that with 10% equity in a property, a customer would have on average up to 4 years of equity buffer with us, allowing them to remain secure in their home and giving them the time they need to get back on their feet again.

Debt-based mortgages are glittery and great when times are good. But they are just too deadly when things go south. That’s why I set up Primary Finance. Because It’s time for a new way of doing finance - it’s time for equitable finance to become the norm.

You can find out more about offerings and about Pfida by visiting www.primary-finance.com.?