Mortgage interest burden lightens in spite of soaring UK house prices

Mortgage borrowers are paying out less in interest than at any time in the past 20 years, even as UK house prices have soared and the total stock of home loans has continued to rise.

UK borrowers spent £31.6bn on mortgage interest in the 12 months to April, the lowest annualised monthly figure since the turn of the millennium, and less than half that paid in the year to October 2008, when the interest bill was at its peak. 

Savills, the estate agent, calculated the interest figure using Bank of England data and adjusted to exclude the impact of last year’s mortgage payment deferral scheme

In its recent credit report for April, the Bank said average mortgage interest rates had fallen to their lowest level on record, at 2.07 per cent. By comparison, average rates in October 2008 were 5.82 per cent. 

The total stock of outstanding mortgage debt (excluding that accounted for by housing associations) has risen from £1.47tn to £1.52tn in the 12 months to April. House prices, meanwhile, rose by an annualised 9.5 per cent in May, according to last week’s Halifax index — its highest level in nearly seven years. 

Annual mortgage payments

Lucian Cook, Savills residential research director, said the greater affordability of mortgage debt had fuelled the housing boom as people sought bigger properties with more outside space or gardens under lockdown. 

“You wouldn’t have seen the same increase in activity if you’d been in a higher interest rate environment, and particularly if you hadn’t been able to lock into low rates of interest on longer term mortgages. People have been able to de-risk by taking on more five-year money,” he said. 

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The “best buy” rate on a five-year fixed rate mortgage is 1.19 per cent with a £999 fee, offered by Barclays to those with a deposit of 40 per cent or more — the lowest rate on the market for at least 12 years, according to Defaqto, a financial information provider. 

For those looking for a 75 per cent loan-to-value mortgage, Defaqto’s current “best buy” is Clydesdale Bank’s 1.49 per cent (with a £999 fee).

Katie Brain, Defaqto consumer banking expert, said: “While the Bank of England kept interest rates low throughout the pandemic, we have not seen this passed on to borrowers like this until now.”

As well as triggering a “race for space”, lockdown left many home owners with extra savings since their spending opportunities were curtailed by the restrictions — and some took the opportunity to pay down more of their mortgage debt with lump sum repayments. Excluding full redemptions, these repayments increased by 13 per cent to £19.5bn in the year to April, Savills said.

Line chart of Excluding lending to housing associations (£m) showing Outstanding mortgage debt

The surging UK market has been driven not by first-time buyers but by home movers, often armed with high levels of housing equity and reacting to the incentive of a temporary stamp duty holiday. Their existing housing wealth has left them less reliant on mortgage debt and therefore less likely than highly leveraged borrowers to fall foul of rules that control how much people can borrow as a proportion of their income. 

“The average income of the average home mover has gone up reasonably substantially over the pandemic, which suggests it is the more affluent buyers who are controlling the market,” Cook said. 

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