Legal News

The Bank of England’s Deputy Governor for financial stability has told the BBC that a further hike in UK house prices may result in thousands of mortgage borrowers experiencing growing financial pressure.

Sir John Cunliffe told BBC radio that rising house prices would result in homebuyers overextending themselves financially to get on the property ladder – and warned of the risk to the UK’s economic stability if people accumulated heavy debts in the form of mortgage debt.

“Our concern is not so much about house prices,” Sir John said. “It is the chain between high house prices, prices growing faster than people’s incomes – and people having to take out bigger and bigger mortgages and the debt that families then have relative to their incomes.”

The Evening Standard reports that new figures from the Nationwide Building Society show house prices in London have risen by 7.3% in the last year to June 2015. Half of all first-time buyers this year required a loan of between £250,000 and £500,000 – just five years ago the average first-time buyer loan was 25% of that figure. Traditionally, deposits for houses are 10% of the asking price – under the coalition government’ Help to Buy scheme, first-time buyers could put down a deposit of 5% on a new home.

Homebuyers traditionally could apply for a mortgage up to two-and-a-half to three times their salary.

However, there has been a growing trend for homebuyers to apply for mortgages four or five times their salary.

The top limit of the Help to Buy scheme was £600,000 for a property – however there were fears that some home buyers would overextend themselves and to be able to afford to buy in London, or to afford a larger or more expensive property.

In London, the average house price has risen above £500,000 – a two-bedroom flat may cost nearer £600,000 to £800,000 in a central location.

Last year, the Bank of England introduced stringent criteria for lenders when assessing whether a homebuyer could afford mortgage repayments. Lenders were required to ask about a mortgage applicant’s outgoings for social expenditure such as mobile phone top-ups, gym membership and entertainment to make sure they would be able to afford repayments once the base rate increased.

The Bank of England also limited lenders to offering loans of four-and-a-half times a salary to just 15% of total homes loans offered to borrowers, to prevent home owners slipping into negative equity once interest rates rise – as happened in the late-1980s and early-1990s property bubble, when many first-time buyers were stretched to repay their mortgages or ended up having to default on home loans and had their homes repossessed by lenders.

House prices in London have slowed since 2014, but are still 40% above 2007 levels.

Online estate agent SellMyHome.co.uk estimates that a typical budget of £250,000 would only enable a homebuyer to purchase 13% of the flats sold in the London Borough of Hackney in 2015.

The east London borough was typically a working class area, but its proximity to the City of London has resulted in escalating house prices and some of the wealthiest homeowners living side-by-side with some of the most deprived housing estates in the country.

Duncan Lewis Housing Solicitors

Duncan Lewis Housing solicitors can advise homeowners and homebuyers on a wide range of housing issues, including debt management, mortgage repossession and local council’s duty to re-house in cases of homelessness.

Duncan Lewis has offices nationwide and also offers competitively priced conveyancing services to homebuyers, including guiding first-time buyers through the conveyancing process.

For expert legal advice on housing and property matters, call Duncan Lewis housing solicitors on 020 7923 4020.