‘One million buyers have never seen a rate rise’; Building society boss warns of a ‘whole generation’ who have never experienced rising mortgage costs

‘One million buyers have never seen a rate rise’

Building society boss warns of a ‘whole generation’ who have never experienced rising mortgage costs

By Nicole Blackmore

10:11AM GMT 28 Feb 2014

The chief executive of Britain’s biggest building society has made a stark warning that a “whole generation” of borrowers have never had to cope with a rise in interest rates.

Graham Beale, writing a blog on Nationwide’s website, said one million first-time buyers have bought a property since interest rates fell to 0.5pc in March 2009 and urged them to consider the impact on their budgets if the cost of borrowing were to begin rising.

The warning came as the society’s monthly index showed yet further rises in house prices. The UK average price rose 0.6pc last month to £177,846, 9.4pc higher than in February 2013.

Citing Bank of England research, Mr Beale said if mortgage rates were to increase by 2.5pc, to return to 2007 levels, it would push up the cost of a typical mortgage by around £230 a month.

He said: “The proportion of people spending more than 35pc of their income on their mortgage could double.”

Experts suggest that 35pc is the safe limit for repayments as a proportion of take-home pay. Mr Beale said: “Aside from too little housing stock is there anything else we should worry about? Interest rates have been static for almost five years now, the longest period since the late 1940s, so a rise in interest rates and the eventual increase in mortgage rates will be unfamiliar for many people.

“More to the point, there have been around a million new first time buyers since rates hit 0.5pc in March 2009, so there is a whole generation of borrowers who have never experienced increases in their monthly mortgage payments.”

He said these borrowers will have been tested to ensure they could afford rate rises, due to “stricter underwriting standards”, but he added: “Whilst stricter underwriting standards mean recent borrowers will have had to show they could afford their mortgage payments in the event of a rate rise, people should start to consider the impact higher mortgage costs might have on their household budgets.”

Analysis published earlier this week by the Centre for Economic and Business Research said home owners could see their mortgage payments rise by £252 a year on average by the end of 2015 if interest rates start rising at a moderate pace. It also forecast that a “drastic scenario” of Bank Rate at 1.75pc by the end of 2015, which it deemed feasible, would push up typical annual repayments by £576, or £48 a month.

Last week, Mark Carney, governor of the Bank of England, said interest rates will not rise until people and businesses begin to share in the economic recovery.

Mr Carney said he wanted to give “comfort” that interest rates will not rise until jobs, wages and spending reach “sustainable” levels of growth.

House prices keep rising

Nationwide today reported that the average UK house price has increased by 0.6pc in the last month to £177,846 – 9.4pc higher than in February 2013.

This is still around 3pc below the peak in 2007, but growth shows no signs of slowing.

The Land Registry also released figures today showing house prices rose 1pc in the month to January to £168,356, resulting in a year-on-year increase of 4.2pc.

House price indices vary significantly because some, such as Nationwide, seasonally adjust their figures and factor in location to create “representative” house prices. Earlier this month the Office for National Statistics said the average UK house price reached £250,000 in December.

Demand for properties is being driven by the record low interest rates, improved availability of mortgages and rising consumer confidence. The number of properties on the market remains limited, particularly in London and the South East, helping to push prices higher.

Robert Gardner, chief economist at Nationwide, said the number of new houses being built is still well below the pre-crisis level, which was already insufficient.

In England for example, around 109,500 new homes were built in 2013. This was 38pc below the level recorded in 2007 and around half the projected number of households that are expected to form annually in the coming years.

Nationwide said the capital has seen a huge surge in house prices thanks to a strong local economy and inward investment from overseas. Prices, which rose 15pc in 2013, are already 14pc above their pre-crisis peak, due in part to a rise in cash buyers. The share of cash transactions increased from around 20pc in 2005/06 to around 35pc in the wake of the financial crisis, although the proportion has remained fairly constant since 2008.

Mr Beale said this increase could be a function of the fact that mortgage transactions declined sharply, rather than the amount of cash transactions increasing over time.

“This reflects the impact of adverse labour market conditions and the tightening of credit conditions after 2008, which limited the number of people able to buy with a mortgage, while fewer such constraints would have applied to cash purchasers,” he said.

“Interestingly, the data suggests that the share of cash purchases in London is not out of line with the rest of the UK. The fact that house prices in the capital are almost double the level prevailing in the rest of the UK presumably acts as a limiting factor.”