Cost of running your home has fallen – but only due to low mortgage rates

THE cost of running the typical Scottish home has tumbled in the past two years thanks to a sharp drop in mortgage interest repayments.

The average annual cost of running a Scottish home fell by 4 per cent to 8,562 between April 2008 and April 2010, according to Bank of Scotland research out today, primarily because of record low interest rates.

However, the figures are published a day after the Bank of England warned that a rebound in interest rates would cause more homeowners to default on their mortgages, leaving them at risk of repossession.

Scots now spend 28 per cent of their average full-time annual earnings on owning and running their home, down from 32 per cent in 2008, but marginally higher than the UK average, Bank of Scotland found. Only in three other UK regions does the cost of running a home take more out of average earnings than in Scotland.

The reduction in costs over the past two years has been driven entirely by a 19 per cent drop in annual mortgage payments. The average borrower in Scotland saw mortgage repayments fall from 5.8 to 3.67 per cent in the two years to the end of April, with the Bank of England slashing interest rates to the current level of 0.5 per cent in March 2009.

All of the other expenses associated with owning and running a home in Scotland have risen since 2008, with 10 per cent increases in maintenance costs, utility bills and household appliances. Telephone bills are up 7 per cent, while the cost of toiletries and cleaning products has risen 6 per cent in the last two years.

Mortgage payments still make up more than a third of total housing costs, however, while energy bills and council tax account for 17 per cent each.

Suren Thiru, housing economist at Bank of Scotland, said: "Over the last two years, the cost associated with owning and running a home in Scotland has fallen, entirely as a consequence of reduced mortgage payments. The drop in housing costs has helped to ease the strain on household finances, providing some relief to homeowners during the economic downturn."

But with most costs rising, the figures underline the extent to which homeowners are dependent on low mortgage repayment levels to keep their finances on track.

The Bank of England yesterday warned that many homeowners are financially vulnerable to a rise in interest rates. Its annual Financial Stability Report noted that mortgage payments have only been affordable for many households because of the current low interest rates.

If interest rates reverted to their long-term average of 5 per cent, many homeowners would be at risk of repossession. The impact of any interest rate rise would be exacerbated if lenders kept margins on mortgages at the current levels, it added.

Kelvin Davidson, property economist at Capital Economics, said: "Even for those that have found themselves with extra cash as a result of rate cuts, there is little evidence that efforts to repay debt have been stepped up. Clearly, house prices will remain vulnerable to interest rate rises for some time to come."