How economic variables could hit borrowers
The Mortgage Fiscal Cliff research revealed that if the CPI saw an increase of 2.5%, projected over five years, this would decrease monthly affordability by £49 in the first year. By the fifth year, monthly affordability would eventually drop to just £56.
Alex Maddox, director of business origination and development at Acenden, said: “As the economy attempts to move towards recovery residential mortgage portfolio owners need to prepare for all the possibilities. Each variable modelled in this research can have a moderate to severe impact on excess household budget.
“However if we see higher CPI and interest rates without wages growing then we will start to see a deeper and worrying problem. Given the realistic possibility of price inflation remaining above interest rates and wage growth there will be inevitable impacts on monthly affordability for borrowers.”
Acenden also warns a 2% increase in UK interest rates would put more than 150,000 additional mortgage accounts at risk of falling into arrears.
The report highlights how the changing economy might affect the mortgage market by modelling the impact of fluctuations in interest rates, inflation and wages on the average borrowers’ monthly affordability, which currently stands at £310.
This is defined as the remaining funds that mortgage holders have to spend once their existing mortgage repayments, recurring expenses and taxes are deducted.
Maddox added: “As such, regular, comprehensive stress testing of mortgage portfolios is essential to ensure residential mortgage agreements are serviced in the most appropriate way and have an appropriate level of capital held against them. It is in portfolio owners’ best interests to mitigate the impact of interest rate rises, inflation and wage fluctuations to keep borrowers on affordable repayment plans and in their homes.”
But the research also indicated there are more positive signs on the horizon.
As the economy recovers just a small percentage increase in wages will have a huge impact on Britain’s households.
If wages rise by 2.5% over the course of five years, Acenden forecasts monthly affordability to increase by £609.
This would leave borrowers with almost £1,000 of disposable income after deductions. This is an increase of 196% against today’s current level.