Homebuyers underestimate monthly mortgage repayments by £500

The Momentum UK Team 10 June 2014

Homebuyers are underestimating mortgage repayments by £500 in their monthly budget, according to research by credit agency Experian.

Experian also predict that this shortfall could rise to £650 per month when interest rates rise. From their research, which surveyed 1,500 prospective British homeowners, the average price of the home they were looking to buy was £235,000. With an average combined annual income of £50,674, those surveyed thought they could afford to pay an average of £780 per month on a mortgage.

The research has found that, based on a 10% deposit, repayments on a £235,000 property would be closer to £1,300 a month. This could rise if a fixed deal converted to a 5.5% standard variable rate at the end of an average two year fixed term. According to Experian’s calculations, a rise in the rate to an average 5.5% SVR would leave the average homeowner with just £100 left over at the end of the month, unless they cut down on their spending.

Peter Turner, managing director of Experian Consumer Services for the UK and Ireland, said:

“As the economy improves, interest rates will inevitably rise, and for first time buyers, who often have less discretionary income, they could well be hit the hardest. It is vital that people understand and take control of their financial situation now to ensure that your dream home does not become a financial nightmare.”

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Two out of three homeowners are vulnerable to a rise in interest rates because they are on a variable rather than fixed rate, according to research by The Telegraph. Variable rates are likely to rise if the Bank of England’s base rate rises. The research also highlighted that current variable mortgage rates have become higher relative to the Base Rate following 2008’s banking crisis, adding to the risk of mortgage repayments becoming unaffordable for borrowers should the Base Rate rise.

The International Monetary Fund has urged British financial providers to take action against risky mortgage lending as rising house prices threaten the current pattern of economic recovery. Christine Lagarde, the IMF’s managing director, urged "targeted and timely" measures to limit high loan-to-income ratio home lending, putting pressure on the Bank of England to act. Chancellor George Osborne has also said that the UK “remains vigilant” for any economic risk emerging from the housing market. The IMF had urged ministers to end the Help to Buy scheme, which offers deposit loans and guarantees for first time buyers and those struggling to buy.

A recent report by Halifax concluded:

"House price inflation is particularly high in London, and is becoming widespread. So far, there are few of the typical signs of a credit-led bubble. Nonetheless, a steady increase in the size of new mortgages compared with borrowed incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.”

Try our mortgage repayment calculator to find out how much you could expect to pay on your mortgage deal, or Money Hub to keep track of your monthly repayments.