Underprepared And Out Of Pocket - Homebuyers Face Financial Squeeze If Rates Rise

[The Masked Tulip]

Below is a press release from a report that Experian have released this morning - been barely covered by the media - about how families are seriously underestimating the cost of mortgages, especially if IRs rise.

There is a very interesting pdf of the full report that covers the various regions, how much people in each region have left over at the end of each month and, most interestingly, how people in each region think they would be able to cope, strugle or not struggle, is mortgage repayments increase. Alas, the pdf is 1.5MB and I can't upload it here.

Anyhow, here are some of the key points below.

(If anyone can find the pdf on their site and link to it it makes a good read. It is called 'The MMR Muddle: Unprepared and out of pocket'.)

Homebuyers underestimate mortgage payments by £500 per month

London, 06 June 2014 - Homebuyers are severely overestimating their ability to repay their mortgage and could see their finances stretched to breaking point in the event of an interest rate rise, according to a report from Experian, the global information services company.

Based on research among 1,500 Britons looking to buy a home, the report¹ (please see attached document) shows homebuyers have their sights set on a property worth an average of £235,000. With a combined household income of £50,674, the average homebuyers claim they can afford an average mortgage payment of £780 a month. However, based on a 10% deposit, repayments on a £235,000 property would actually be nearer to £1,300 a month, and potentially more, depending on their credit history and the lenders policy rules.²

The situation becomes even more problematic if, as is widely reported, the Bank of England moves to increase base interest rates in 2015. Although people may be able to afford such a property at present, even modest interest rate rises could make meeting their monthly repayments difficult and leave little available cash at the end of the month for unforeseen living costs.

Mortgage payments could soar to £1,440, almost double what the average homebuyer claims they can afford, should variable rates convert to 5.5% at the end of a typical two-year fixed deal – a 1.5 point rise on current rates.³

Peter Turner, Managing Director, Experian Consumer Services, UK & Ireland, commented:

“These findings show just how important it is to get your finances in the best shape possible in advance of a mortgage application. It’s not just a case of making sure you’re accepted; it’s a case of using your finances to land the best rate possible. Ensuring that your mortgage application gets the highest credit score possible can make a difference of hundreds of pounds a month, and thousands over the course of mortgage’s lifetime.”

Yet the research also suggests that many homebuyers may be guilty of complacency when it comes to getting their finances in order and making the changes necessary to improve their credit report to ensure their mortgage application gets the best credit score possible.

Only 23% of respondents have checked their credit report in the last six months, which would help provide a clear picture of how their credit history is likely to be viewed by lenders – as well as the positive and negative factors that could affect their credit score.

Also, only 15% plan to bring down their current debt prior to making their application; however, a quarter plan to clear their outstanding debt, which could not only improve their credit score but also free up additional funds each month.

In addition, the Experian Mortgage Matters Report found the household income mentioned above covers:

· approximately £371 in discretionary spending each month (e.g. socialising and hobbies); therefore, the potential for homeowners to be financially squeezed is clear;

· mandatory living costs of £603 a month (e.g. food, shopping and heating);

· existing credit obligations of £248 a month (excluding mortgage payments);

· an average payment of £602 into savings, pension contributions and insurance per month (although 48% of homebuyers pay less than £250 on these per month);

· rent of £333 (for those who rent);

· existing mortgage payments of £624 (for those with a mortgage, with 23% paying more than £750 and 11% more than £1,000);

· left-over money at the end of the month of £760.

However, the average buyer could only have £100 to their name at the end of the month should interest rates increase, unless they cut back on their spending⁴.

A further cause for concern is that 35% of buyers admit that they would find it hard to make ends meet if their mortgage became more expensive than what they had budgeted for .

First time buyers beware

In the case of first-time buyers, they are targeting a home worth £193,000 and could see their mortgage payments soar to £1,060 on the same two-year deal mentioned above – 60% more than what the typical first-time buyer can afford (please see attached report for more information on first-time buyers).

Turner continues:

“It is somewhat concerning to see such gaps in first time buyers’ awareness of long term affordability and the possible impact of interest rate increases. 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.”

Here are some simple tips from Experian CreditExpert to help mortgage applicants get the best interest rates possible:

1. Know your budget. As soon as you decide to look for a property, scrutinise your last few months’ outgoings carefully to understand your spending habits. Are there things you could do without to finish each month with cash in the bank?

2. Know what you can really afford. Visit a broker or use an online mortgage calculator to work out your likely repayments. Importantly, play with the interest rate settings to see if you could afford repayments if rates rise by 1%, 2% or more.

3. Make sure your credit report is up to date. As well as checking your outgoings, you should also check your credit report, which includes a record of all your borrowing over the last six years. Ensure everything is accurate and up-to-date.

4. Does your Experian Credit Score need work? The Experian Credit Score is a guide to help you understand how a lender might score your credit worthiness. If it’s lower than you expected, ask the experts for help and ensure your credit report paints the best picture possible before you make your application.

5. Build good behaviours. Finally, from now until your application, try to appear like an ideal mortgage borrower. Show you can make it through several months with a slight surplus. Don’t take out additional borrowing and try to demonstrate you can comfortably manage any outstanding credit commitments you have

Notes to editors:

¹ The MMR Muddle: Underprepared and Out of Pocket, Experian, May, 2014. Based on research carried out online by Canadean Consumer in April 2014 on behalf of Experian CreditExpert among a representative panel of 1,457 UK adults looking to buy a property in the next year.

² Based on a typical mortgage lender’s mortgage calculator for an applicant with a 10% deposit.

³ Assuming a borrower has a two-year fixed deal that currently reverts to 4% variable, instead reverting to 5.5%.

⁴ Buyers have an average of £760 in ‘spare’ cash at the end of the month. Assuming mortgage payments reach £1,440 and are therefore £660 over budget, buyers will have spare cash of only £100 without making savings elsewhere.

[Bloo Loo]

rent?...£333??

[brunobald]

Are these joint income buyers not planning on having family?

Childcare is a monumental cost, then the cost of actually feeding and clothing your kids. What happening if the mother or father decides to stay at home. I know a lot of young couples that have bought places on a joint income before having family and I don't see how they can possible afford the mortgage if they have family even before rate rises.

[The Masked Tulip]

REGIONAL BREAKDOWNS

This is interesting - for example, the Welsh have amongst the lowest cash left over at the end of each month but seem surprisingly confident that they will be able to pay their mortgages if IRs rise.

East Anglia

• One in 10 (10%) people in East Anglia pay between
£501-750 on discretionary spending such as
socialising and hobbies

• They have an average of £644.64 leftover at the end
of each month

• 48% of people living in East Anglia were looking to
buy a house in the next 6 months

• The average value of property people living in East
Anglia are looking to buy is £210,000.59

• People living in East Anglia can afford an average of
£683.30 for a monthly mortgage repayment

• 22% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

East Midlands

• One in 10 (11%) people in the East Midlands don’t
know how much they pay on discretionary spending
such as socialising and hobbies each month, while
13% pay between £251-500

• They have an average of £703.37 leftover at the end
of each month

• 33% of people living in the East Midlands were
looking to buy a house in the next 6 months

• The average value of property people living in the
East Midlands are looking to buy is £185,047.33

• People living in the East Midlands can afford
an average of £681.57 for a monthly mortgage
repayment

• 31% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

London

• One in 10 (10%) people in London pay between £751-
1,000 on discretionary spending such as socialising
and hobbies each month

• They have an average of £1,398.62 leftover at the end
of each month

• 25% of people living in London were looking to buy a
house in the next 6 months

• The average value of property people living in
London are looking to buy is £357,180.48

• People living in London can afford an average of
£1,398.79 for a monthly mortgage repayment

• 41% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

North East

• 13% of people in the North East pay between £251-
500 on discretionary spending such as socialising
and hobbies each month

• They have an average of £621.67 leftover at the end
of each month

• 25% of people living in the North East were looking
to buy a house in the next 6 months

• The average value of property people living in the
North East are looking to buy is £151,875.51

• People living in the North East can afford an average
of £483.48 for a monthly mortgage repayment

• 39% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

North West

• 16% of people in the North West pay between £251-
500 on discretionary spending such as socialising
and hobbies each month

• They have an average of £516.77 leftover at the end
of each month

• 34% of people living in the North West were looking
to buy a house in the next 6 months

• The average value of property people living in the
North West are looking to buy is £185,959.39

• People living in the North West can afford an
average of £575.27 for a monthly mortgage
repayment

• 34% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

Scotland

• 14% of people in Scotland pay between £251-500
on discretionary spending such as socialising and
hobbies each month

• They have an average of £694.46 leftover at the end
of each month

• 45% of people living in Scotland were looking to buy
a house in the next 6 months

• The average value of property people living in
Scotland are looking to buy is £211,352.57

• People living in Scotland can afford an average of
£779.19 for a monthly mortgage repayment

• 69% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

South East

• 17% of people in the South East pay between £251-
500 on discretionary spending such as socialising
and hobbies each month, whilst one in 10 (9%) don’t
know

• They have an average of £665.42 leftover at the end
of each month

• 40% of people living in the South East were looking
to buy a house in the next 6 months

• The average value of property people living in the
South East are looking to buy is £254,605.79

• People living in the South East can afford an
average of £789.42 for a monthly mortgage
repayment

• 33% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

South West

• 14% of people in the South West pay between £251-
500 on discretionary spending such as socialising
and hobbies each month, whilst one in 10 (9%) don’t
know

• They have an average of £339.46 leftover at the end
of each month

• 41% of people living in the South West were looking
to buy a house in the next 6 months

• The average value of property people living in the
South West are looking to buy is £219,262.88

• People living in the South West can afford an
average of £510.81 for a monthly mortgage
repayment

• 33% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

Wales

• 40% of people in Wales pay between £101-250 on
discretionary spending such as socialising and
hobbies each month

• They have an average of £407.61 leftover at the end
of each month

• 33% of people living in Wales were looking to buy a
house in the next 6 months

• The average value of property people living in Wales
are looking to buy is £167,046.00

• People living in Wales can afford an average of
£515.98 for a monthly mortgage repayment

• 19% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

West Midlands

• 21% of people in the West Midlands pay between
£251-500 on discretionary spending such as
socialising and hobbies each month

• They have an average of £690.23 leftover at the end
of each month

• 53% of people living in the West Midlands were
looking to buy a house in the next 6 months

• The average value of property people living in the
West Midlands are looking to buy is £196,336.81

• People living in the West Midlands can afford
an average of £713.11 for a monthly mortgage
repayment

• 23% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

Yorkshire & Humberside

• 16% of people in Yorkshire & Humberside pay
between £251-500 on discretionary spending such as
socialising and hobbies each month

• They have an average of £541.21 leftover at the end
of each month

• 46% of people living in Yorkshire & Humberside were
looking to buy a house in the next 6 months

• The average value of property people living in
Yorkshire & Humberside are looking to buy is
£172,991.59

• People living in Yorkshire & Humberside can afford
an average of £504.97 for a monthly mortgage
repayment

• 28% of people agree or strongly agree they would
struggle to make ends meet if their mortgage
became more expensive

[Bloo Loo]

frack me, 22 million households, and 33% of them are all looking to buy in the next 6 months.

the market is going to go absolutely apeshit.

course, the survey could be total BS too...

[“Nasty Piece of work”]

It should be remembered that IR rises are WHEN, not IF (and the survey does look rather iffy).

[Corruption]

Are these joint income buyers not planning on having family?

Childcare is a monumental cost, then the cost of actually feeding and clothing your kids. What happening if the mother or father decides to stay at home. I know a lot of young couples that have bought places on a joint income before having family and I don't see how they can possible afford the mortgage if they have family even before rate rises.

Only people who dont work can truly afford a family, balls to being on 35K a year and having to try buying an average 3 bed semi detached house and pay for what youve listed.

Maybe if you were a striver you could be OK.

[zugzwang]

It should be remembered that IR rises are WHEN, not IF (and the survey does look rather iffy).

On the contrary, Osborne still needs to borrow ~7% of GDP every single year to hold the economy upright. If anything the next interest rate move will be down.

[“Nasty Piece of work”]

Whether the NEXT move is down, up, or sideways, IRs will rise in time. To suggest they will never rise is dishonest and plain wrong.

[interestrateripoff]

rent?...£333??

Are you suggesting the imputed rent figure is made up!!!!

Although that figure does appear a little low.

[Si1]

that's the ipod fee

baby boomers didn't have ipods so could afford a small underestimate like this

[Reck B]

• The average value of property people living in the

South West are looking to buy is £219,262.88

• People living in the South West can afford an

average of £510.81 for a monthly mortgage

repayment

These stats are frying my brain.

WTF?!

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

<HEAD EXPLODES>

Edited June 6, 2014 by Reck B

[winkie]

• The average value of property people living in the

South West are looking to buy is £219,262.88

• People living in the South West can afford an

average of £510.81 for a monthly mortgage

repayment

I would say because most of the housing that is bought no debt is required.......so a £219,262.88 costs nothing to debt service, it only costs the loss of what that money could create/make.....but wait, nowadays nothing much makes, so you might as well live in it, that must be worth quite a bit.

[Democorruptcy]

These stats are frying my brain.

WTF?!

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

Does not compute

<HEAD EXPLODES>

You are forgetting how aspirational people are to own their "castles"

Assuming the £219k is a new rabbit hutch, with HTB they get a 20% equity loan pay a 5% deposit, the mortgage is £164k. At 3% ... 50 year term.... the initial payment is £528. They just have to realise that they have signed their future pay rises over to a bank, if, interest rates rise.

http://www.drcalculator.com/mortgage/uk/

[FallingAwake]

So the overall message from this Experian report is... check your Experian Credit Score.

Nice bit of marketing. Beats someone shouting "Cillit Bang!" into the screen

[okaycuckoo]

So the overall message from this Experian report is... check your Experian Credit Score.

Nice bit of marketing. Beats someone shouting "Cillit Bang!" into the screen

Free initial report from Experian. If you don't cancel the contract at the end of the specified period your CC gets charged a small monthly fee. Which you probably won't notice. Sweet.

[steve99]

Dont hold your breath. Japan is near on 20 years and counting. No side of UK politics will do anything to ***** the bubble. In real life terms, zirp is forever. The good news in Japan though is that house prices are still dropping unlike the uk.

ps edit. I used the word p r i c k which was ***** out ??? This site is too touchy, I was not swearing but swearing should be allowed on account of it adds to modern day expressiveness

Edited June 8, 2014 by steve99

[MattW]

REGIONAL BREAKDOWNS

This is interesting - for example, the Welsh have amongst the lowest cash left over at the end of each month but seem surprisingly confident that they will be able to pay their mortgages if IRs rise.

East Anglia

• One in 10 (10%) people in East Anglia pay between

£501-750 on discretionary spending such as

socialising and hobbies

• They have an average of £644.64 leftover at the end

of each month

• 48% of people living in East Anglia were looking to

buy a house in the next 6 months

What? Nearly half of the population of East Anglia are looking to buy a house in the next 6 months? I don't buy that for a second.

£644 left over at the end of each month? That would be nice.

These statistics seem all too rosy to me.

[MattW]

rent?...£333??

I wish!

I reckon that statistic is probably skewed by 'social housing' rents.