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House prices are 6.1 times annual earnings on average

  • October 03 2016
  • Ben Emerson

Low interest rates are bad news for savers and pension holders, but good news for borrowers and homeowners with mortgages. For many, the consistently low interest rates throughout the most recent recession meant that at least they could keep their homes,


Ironically, though, these low interest rates have pushed up house prices considerably because demand for housing is higher than ever – so many people can afford to take out mortgages that sellers can demand ever higher purchase prices. According to Fathom Consulting, the UK’s average house prices are 6.1 times the nation’s average earnings.

Why have house prices increased?

In 2014, new regulations were brought in to ensure that mortgage lenders were forced to take into account how affordable a mortgage would be to a borrower before approving a mortgage application. Mortgagees would have to be sure that a mortgagor could actually afford to pay their mortgage instalments each month (even allowing for notional significant rises in interest rates) alongside their other financial obligations and living costs. Before then, though, it was standard practice for lenders to grant mortgages for over 100% of the purchase price, calculating how much money they would lend with simple reference to a borrower’s income: they would offer a multiple of the borrower’s gross salary regardless of what other outgoings the borrower may have.

The 2014 changes may have led to more responsible lending criteria, but the low interest rates still make borrowing very attractive because buyers feel confident that they could afford the monthly repayments on more expensive properties. House prices may settle down again once interest rates begin to rise, but it is uncertain that this will happen in the foreseeable future – and it is likely that any interest rate rises will initially be very slight.

Demand for housing, driven by low interest rates and George Osborne’s Help to Buy scheme, has driven house prices up. Fathom Consulting warns that house prices would need to fall by a staggering 40% or incomes would need to grow by an amazing 10% to get back in line with each other over the next five years. This would put prices back to the pre-recession rate of 3.5 times average earnings. This might be achieved if more houses are built and the government is under constant pressure to build more affordable housing.

How can you secure affordable borrowing?

blog house prices image

Now is a good time to borrow a mortgage in terms of the interest rates you are likely to be offered, but house prices are so high that even a modest interest rate on a large mortgage could be too expensive. If you have a poor credit history then getting a low interest rate will be difficult, regardless of the state of the economy. If you have no credit history – perhaps because you are a first time buyer and have not yet had to borrow any form of credit – then your social score could help you. Your social score is based on your use of social media and is a surprisingly accurate tool for assessing personality, attitude to risk, lifestyle and associations that lenders sometimes use in conjunction with a standard credit check

As rent prices are also increasing, if you want to live independently then you may decide that buying is right for you despite the high purchase price. You can see if your social score report would help or hinder you in an application for a mortgage by applying for a copy of your report with a free trial* with Credit Angel and then taking any necessary steps to improve it.


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