Increases in interest rates are the single most significant factor in deteriorating mortgage affordability, new analysis from Fitch Ratings reveals.
The agency estimates that mortgage affordability, measured as the proportion of household net income spent on monthly mortgage payments, will deteriorate in 2023 to its weakest level since the 2008 global financial crisis.
Lengthening loan terms, which have helped borrowers limit monthly payments in recent years, will not be able to compensate for the significant increases in interest rates as lenders will not be willing to extend loan terms beyond the borrower’s retirement age.
In the buy-to-let sector, Fitch estimates that affordability deterioration will be greater than for owner-occupied lending due to the dominance of interest-only products which are more sensitive to rises in interest rates than capital and interest lending.
Despite strong rental growth, leading to rising yields on residential property, Fitch’s analysis claims that average interest coverage ratios will deteriorate by around a quarter during 2023.
It also expects affordability pressure in both the owner-occupied and buy-to-let sectors to ease through 2024 and 2025.
Interest rate reductions will help to lower monthly mortgage payments while nominal earnings continue to increase.
House prices, which have been predicted to contract by up to 7% in 2023, should stabilise and return to growth but at a slower pace than nominal wages.
