Ask the Council of Mortgage Lenders (CML) and it’ll tell you that mortgages today are the most affordable relative to income they’ve ever been. A mere 10.6% of gross income was needed to cover average mortgage interest payments in November. Other than a brief low of 10.2% in mid-1996, that’s the lowest number since the CML started recording data in 1974.
Capital Economics (CE) doesn’t agree. It says mortgage affordability is “only in line with its long-run average and is no better than it was in 2004”. The difference in opinion comes about because the CML only measures mortgage interest, whereas CE looks at mortgage interest and repayments. CE also measures mortgage payments as a share of national average disposable earnings, whereas the CML measures it against the average gross income of mortgage borrowers.
So which measurement makes more sense? We guess it is CE’s. Why? Because looking at gross income doesn’t really make much sense – no one gets to spend their income pre-tax. So it doesn’t really matter how high it is. More relevant is net income – and if you measure the debt burden against that, you see that it rises significantly.
Still, regardless of how affordable mortgages may or may not be, the best response to your housing debts is the same as it has been for some time: pay off as much as you can as fast as you can. Lending practices have tightened significantly since the credit crunch began. That means that to get the best possible mortgage deal you need to have a low loan-to-value ratio – the best mortgages are available to those who only need to borrow around 60% or less of the value of their home. So the more of your mortgage that you pay off before you need to remortgage the better.
However, there is also good news on the remortgaging front. The new year has brought a raft of rate cutting by the banks and building societies, so there are some relatively good-looking deals around. All you need to do is decide the answer to the biggest personal finance question of the decade: to fix or not to fix? At present, there is a pretty even split between the experts on this question. Some believe interest rates could rise towards the end of this year as the Bank of England moves to prevent a sterling crisis. Others claim they will stay low for at least another year.
But no one really knows. That means you have to move forward based on what you can afford. If your financial position is good and you could afford your mortgage, even if interest rates move up, then opt for the usually slightly cheaper variable rates. But if you can’t afford to take the risk, then pay up for peace of mind instead and go for a two- or three-year fixed-rate deal.