The Fitch Ratings UK Housing and Mortgage Affordability 2023 report said that when looking at the percentage of income allocated to mortgage payments, this was expected to “deteriorate to a level not seen since 2008”.
The firm said affordability improved from 2008 to 2020 as interest rates fell and loan terms increased, but the house price growth over 2020 and 2021, followed by the rise in mortgage pricing in 2022 had set that back.
However, this will improve over 2024 and 2025, as house prices fall relative to income and interest rates decrease.
By 2025, Fitch expects mortgage affordability for new lending to come close to levels seen in 2014 to 2015. It forecast that house prices will fall by seven per cent in 2023 while over 2024 and 2025, price growth is not expected to rise above “the nominal growth in wages”.
It said: “For existing lending, the prevalence of fixed rate products slows down the transmission of interest rate changes to borrowers’ mortgage payments. Households taking new fixed rate products in 2023 will not see the benefit of falling interest rates until after those products come to an end.”
Fitch said its expectations were based on changes to mortgage rates, but added tighter monetary policy could slow this down. However, earlier and larger interest rate cuts could have an inflationary impact on house prices with “implications for home movers and first-time buyers”.
Lenders might also reduce their exposures to high loan to value (LTV) products as house prices fall, Fitch predicted.
Fitch Ratings said: “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.”
Better conditions for first-time buyers
Fitch said the drop in house prices would bring down the deposit-to-income ratio from two times income to around 1.75 this year. This will bring it to similar levels to those seen in 2019, before market stimulation caused house prices to rise significantly.
It said: “We anticipate the deposit-to-income ratio will fall in all regions but with the largest impact in those that are least affordable. This is the result of our expectation of falling home prices in 2023 coupled with continued earnings growth.
“We expect home prices to underperform earnings in each of the next three years leading to continued improvements for those looking to enter the property market.”
Weakest BTL affordability in 10 years
Fitch said buy-to-let mortgage affordability had been hit harder than owner-occupier affordability, despite an improvement in rental yields.
This was down to the greater number of interest-only mortgages in the buy-to-let space, which are more sensitive to rate rises.
It said the 4.5 per cent base rate would result in mortgage rate increases outpacing the 3.5 per cent prediction for rental growth.
Fitch said average interest coverage ratios (ICRs) would fall by around a quarter this year.
Looking ahead, buy-to-let affordability could improve to levels seen at the start of 2022 as long as mortgage rates fall to four per cent in 2024 and 3.5 per cent in 2025 alongside continued rental growth.
Fitch said incomes would keep up with rising rents by the end of 2025, so renters would not be spending a high proportion of their income on rent. However, it said the cost of living crisis this year could result in a rise in rental arrears.
It added: “We believe arrears will rise through the remainder of 2023 as increases in interest rates feed through to borrowers, either as a result of variable mortgage rates, or fixed products coming to an end and borrowers refinancing.
“We anticipate increases in late stage arrears in both 2023 and 2024 as borrowers with the least financial flexibility struggle to adapt to higher payments.”
It said a decrease in interest rates coupled with a rise in income in 2025 would lead to an improvement in market performance, with late stage arrears projected to be at around 1.5 per cent. This will make the rate of late stage arrears lower than in 2009 due to conservative lending standards which have been in place since 2014.
Fitch Ratings said: “Fitch expects 2023 to be the weakest year for buy-to-let affordability for a decade although ICRs should recover in 2024 and 2025 as rents continue to rise and interest rates decline. We anticipate a return to 2015 levels by the end of 2025.”
