Recent official figures have revealed that homebuyers are being lent more money by banks than at any time since the global financial crisis a decade ago, with many of the borrowers being young people for whom stepping onto the property ladder is barely affordable. As such, billions of pounds of debt which may prove unsafe is being taken on by them at a time when interest rates are expected to rise.
Someone putting down either a 5% or 10% deposit on a property in order to borrow a minimum of 3.5 times their salary (or 2.75 times their combined income for couples) falls into this category. For example, someone earning £30,000 a year and buying a house worth £116,000 with a £105,000 mortgage would be part of this group, as would a couple earning £50,000 a year between them and holding a mortgage of £137,500 on a property bought for £152,000.
During the first three months of 2010, loans to people falling into this category reached a combined total of £279 million. In the three months to July 2017, that figure had risen to £2.2 billion. This marks a huge increase of 670% in just over seven years, with the total doubling in only the last two years.
The situation has been driven by house prices rising much faster than the salaries of first-time buyers, forcing many of them to take on increasingly large amounts of debt in order to own their own home. However, the indication by the Governor of the Bank of England, Mark Carney, that interest rates could be set to rise within the next two months, could result in these big borrowers struggling to manage their debt. At least ten lenders, including Nationwide and Halifax, increased their rates at the start of October in anticipation of a rise in the Bank Rate.
Even a small rate increase could add hundreds of pounds to the mortgage payments of those with the heftiest variable-rate mortgages. A rise from the current rate of 0.25% to 0.5% would result in a homeowner with a £150,000 mortgage experiencing an average yearly increase on their repayments of £259. Many are predicting further increases in the future, however, with a second rise to 0.75% before the end of 2017, which would bump the average mortgage bill up by £520 annually. Some economists are expecting rates to go up to 2.25% in the next two years, which would result in mortgage repayments going up by £1,056 a year.