House sales could soon plunge as mortgages skyrocket

The Bank of England increased the bank rate by 0.5 percentage points to 2.25 pc mailing it the highest level since 2008. The average monthly mortgage bill has now risen to £1,150, a jump of £349 since the beginning of the year, according to estate agency Savills. After bank rate rise, a typical buyer purchasing a £300,000 home with a £280,000 mortgage will pay an additional £65 a month, snowballing to an extra £780 a year.
 
In turn, rapidly escalating mortgage rates could make homes the most out of reach with earnings they have been since the early 90s, according to a research. In July, the gap between the mortgage bill on an average home and what a typical person could afford to pay was already 17pc, according to Neal Hudson. This was based on an effective mortgage rate of 2.3pc. If mortgage rates climbed to 4 pc, the “overvaluation gap” would widen to 40 pc, Hudson warned.
 
This would be the biggest gap between house prices and what the average person can afford to pay since September 2008 – just as the financial crisis was triggering a near- 20 pc fall in house prices. In some ways, this affordability crunch has already hit. For a buyer entering the market now, mortgage rates already well exceed 4 pc.
 
The average rates for two and five-year fixed-rate deals at the start of September were 4.24 pc and 4.33 pc respectively, according to Moneyfacts, an analyst. If the gap between actual house prices and what a person can afford to pay is 40 pc, that means house prices would need to fall by 29 pc before they came back in line with the affordability benchmark, Hudson said. With mortgage rates at 6 pc, the gap between the mortgage bill on an average home and what a typical person could actually afford to pay would widen to 71 pc, Hudson said. This means homes would be the most “overvalued” on record since September 1990. Back then, house prices also fell by a fifth, but the housing downturn was more protracted, lasting for four years.