Mortgage affordability took a beating in the UK last year as the collapse of the American sub prime mortgage market rippled through the global economy, but the Council of Mortgage Lenders believes that two recent base rate cuts will ease the debt burden in 2008.

First time buyer mortgage affordability was perhaps the most adversely affected; in 2006, first time buyers were paying an average of 17.9 per cent of their income towards mortgage interest, which rose to 20.7 per cent by December 2007. This was not in conjunction with an equal rise in income, which was 3.38 per cent in 2007, compared with 3.34 per cent the year before.

Rising interest payments can be largely put down to successive increases in the base rate up to July last year, but the CML explains that current figures do not take the recent rate cuts or any future ones into account, which stands to considerably ease affordability constraints.

In order to secure their finances as much as possible, a record 73 per cent of borrowers opted for a fixed rate mortgage in 2007 to stave off any potential hardship from increases in the base rate by the Monetary Policy Committee. Demand for fixed rate deals dropped towards the end of the year, as people anticipated rate cuts.

“The decline in lending appears to be driven more by funding constraints than lower consumer demand.” CML director general, Michael Coogan, said. “Affordability has been stretched further in 2007 but the recent base rate cuts and the expectation of future cuts will ease debt servicing burdens in 2008.

“The impact of payment shock on the large numbers of borrowers coming to the end of fixed rate mortgages will also be less than we anticipated last year. For first time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses.”

Meanwhile, Stewart Robertson, senior economist at Norwich Union, believes that while the economy will slow down as a result of “weaker housing and consumer

spending”, it will avoid a recession and the base rate will be cut by at least one per cent by the end of the year.

Mr Robertson also warns of higher food, gas and electricity bills and tighter budgets, but on a lighter note, he adds that “the housing market may see falls in some areas, but fears that prices will fall by 20 per cent or more is probably overdone. There has been some good news: car sales appear to be improving while the number of new jobs created picked up sharply towards the end of 2007.”

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