1.1m homes on mortgage debts nearly five times their income

MORE than 1.1 million households were sitting on mortgage debts worth more than 4.5 times their income in 2013, although the number has fallen in recent years, according to official figures.
More than one million homes are sitting on mortgages that exceed their income by more than 4.5 times. Picture: Jane BarlowMore than one million homes are sitting on mortgages that exceed their income by more than 4.5 times. Picture: Jane Barlow
More than one million homes are sitting on mortgages that exceed their income by more than 4.5 times. Picture: Jane Barlow

The Office for National Statistics (ONS) released the figures as it looked at how potentially exposed mortgage borrowers could be to any hike in interest rates.

The data shows that in 2013, 1,117,000 households had mortgage debts amounting to over 4.5 times their disposable income - representing nearly one in seven (13.2 per cent) households with mortgages.

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But this was a fall compared with 2011, when 1.3 million households had mortgage debts at this level, representing a higher share of 14.5 per cent of mortgagor households.

A quarter of households with mortgage debts at this level in 2013 were concentrated in London and a further 27 per cent were located in the East or the South East of England, the ONS said.

Matthew Whittaker, chief economist at think-tank the Resolution Foundation, said it is “concerning” that the number of households with high levels of mortgage debt relative to their income has fallen only slightly during a period of rock bottom interest rates.

He said: “With rate rises back on the agenda... it’s vital that banks engage with their customers to explain how their mortgage repayments could rise.”

Toughened mortgage lending rules came into force across the industry in April 2014 under the Mortgage Market Review (MMR), which force lenders to carry out more thorough checks into the spending habits of both home buyers and people looking to re-mortgage, to make sure their loans are truly affordable.

Lenders must apply “stress tests” to mortgage applications to make sure borrowers could still afford their payments if interest rates started to climb.

In further moves to curb risky lending, the Bank of England also imposed limits on the supply of credit to “highly leveraged” households in October 2014 - defined as those with debt-to-income ratios above the 4.5 multiple. A household’s leverage is the amount of debt they have relative to their income.

A string of recent reports pointed to a wave of households rushing over the summer to snap up cheap mortgage deals before they disappear off the market, amid speculation over when the Bank of England base rate could start to increase from its historic 0.5 per cent low.

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Many mortgage lenders have been offering their lowest ever rates in recent months, although there have been signs that some of the best deals have already gone.

The ONS report said that if households have used the period of low interest rates to reduce their levels of debt and interest payments relative to their income, then the direct effect of a rise in interest rates will be “relatively muted”.

But by contrast, if households have “normalised” low interest rates then they may have taken more debt relative to their income than is best for them in the long run, the report said.

It said the latter scenario could result in “considerable mortgage distress if interest rates return to their previous, higher levels”.

The ONS said that following a “substantial rise in leverage” between 2001 and 2008, total household long-term debt fell from a peak of 131.2 per cent of income in the third quarter of 2008 to 118.5 per cent of income in the second quarter of 2015.