Underprepared and out of pocket: homebuyers face financial squeeze if rates rise

news release

Underprepared and out of pocket: homebuyers face
financial squeeze if rates rise

Homebuyers underestimate mortgage payments by £500 per month

London, 5 June 2014 - Homebuyers are severely overestimating their ability to repay their mortgage and could see their finances stretched to breaking point in the event of an interest rate rise, according to a report from Experian, the global information services company.

Based on research among 1,500 Britons looking to buy a home, the report1 (please see attached document) shows homebuyers have their sights set on a property worth an average of £235,000. With a combined household income of £50,674, the average homebuyers claim they can afford an average mortgage payment of £780 a month. However, based on a 10% deposit, repayments on a £235,000 property would actually be nearer to £1,300 a month, and potentially more, depending on their credit history and the lenders policy rules2.

The situation becomes even more problematic if, as is widely reported, the Bank of England moves to increase base interest rates in 2015. Although people may be able to afford such a property at present, even modest interest rate rises could make meeting their monthly repayments difficult and leave little available cash at the end of the month for unforeseen living costs.

Mortgage payments could soar to £1,440, almost double what the average homebuyer claims they can afford, should variable rates convert to 5.5% at the end of a typical two-year fixed deal – a 1.5 point rise on current rates3.

Peter Turner, Managing Director, Experian Consumer Services, UK & Ireland, commented:

“These findings show just how important it is to get your finances in the best shape possible in advance of a mortgage application. It’s not just a case of making sure you’re accepted; it’s a case of using your finances to land the best rate possible. Ensuring that your mortgage application gets the highest credit score possible can make a difference of hundreds of pounds a month, and thousands over the course of mortgage’s lifetime.”

Yet the research also suggests that many homebuyers may be guilty of complacency when it comes to getting their finances in order and making the changes necessary to improve their credit report to ensure their mortgage application gets the best credit score possible.

Only 23% of respondents have checked their credit report in the last six months, which would help provide a clear picture of how their credit history is likely to be viewed by lenders – as well as the positive and negative factors that could affect their credit score.

Also, only 15% plan to bring down their current debt prior to making their application; however, a quarter plan to clear their outstanding debt, which could not only improve their credit score but also free up additional funds each month.

In addition, the Experian Mortgage Matters Report found the household income mentioned above covers:

  • approximately £371 in discretionary spending each month (e.g. socialising and hobbies); therefore, the potential for homeowners to be financially squeezed is clear;
  • mandatory living costs of £603 a month (e.g. food, shopping and heating);
  • existing credit obligations of £248 a month (excluding mortgage payments);
  • an average payment of £602 into savings, pension contributions and insurance per month (although 48% of homebuyers pay less than £250 on these per month);
  • rent of £333 (for those who rent);
  • existing mortgage payments of £624 (for those with a mortgage, with 23% paying more than £750 and 11% more than £1,000);
  • left-over money at the end of the month of £760.

However, the average buyer could only have £100 to their name at the end of the month should interest rates increase, unless they cut back on their spending4.

A further cause for concern is that 35% of buyers admit that they would find it hard to make ends meet if their mortgage became more expensive than what they had budgeted for.

First time buyers beware

In the case of first-time buyers, they are targeting a home worth £193,000 and could see their mortgage payments soar to £1,060 on the same two-year deal mentioned above – 60% more than what the typical first-time buyer can afford (please see attached report for more information on first-time buyers).

Turner continues:

“It is somewhat concerning to see such gaps in first time buyers’ awareness of long term affordability and the possible impact of interest rate increases. As the economy improves, interest rates will inevitably rise, and for first time buyers, who often have less discretionary income, they could well be hit the hardest. It is vital that people understand and take control of their financial situation now to ensure that your dream home does not become a financial nightmare.”

Here are some simple tips from Experian CreditExpert to help mortgage applicants get the best interest rates possible:

  1. Know your budget. As soon as you decide to look for a property, scrutinise your last few months’ outgoings carefully to understand your spending habits. Are there things you could do without to finish each month with cash in the bank?
  2. Know what you can really afford. Visit a broker or use an online mortgage calculator to work out your likely repayments. Importantly, play with the interest rate settings to see if you could afford repayments if rates rise by 1%, 2% or more.
  3. Make sure your credit report is up to date. As well as checking your outgoings, you should also check your credit report, which includes a record of all your borrowing over the last six years. Ensure everything is accurate and up-to-date.
  4. Does your Experian Credit Score need work? The Experian Credit Score is a guide to help you understand how a lender might score your credit worthiness. If it’s lower than you expected, ask the experts for help and ensure your credit report paints the best picture possible before you make your application.
  5. Build good behaviours. Finally, from now until your application, try to appear like an ideal mortgage borrower. Show you can make it through several months with a slight surplus. Don’t take out additional borrowing and try to demonstrate you can comfortably manage any outstanding credit commitments you have


Notes to editors:

1The MMR Muddle: Underprepared and Out of Pocket, Experian, May, 2014. Based on research carried out online by Canadean Consumer in April 2014 on behalf of Experian CreditExpert among a representative panel of 1,457 UK adults looking to buy a property in the next year.
2Based on a typical mortgage lender’s mortgage calculator for an applicant with a 10% deposit.
3Assuming a borrower has a two-year fixed deal that currently reverts to 4% variable, instead reverting to 5.5%.
4Buyers have an average of £760 in ‘spare’ cash at the end of the month. Assuming mortgage payments reach £1,440 and are therefore £660 over budget, buyers will have spare cash of only £100 without making savings elsewhere.

For more information please contact:

Bell Pottinger
Anna Selby – 020 7861 2438 / aselby@bell-pottinger.com
Michael Sheen – 020 7861 3013 / msheen@bpconsumer.co.uk
Rebecca Lloyd Wright – 020 7861 2499 / RLloydWright@bell-pottinger.com

Experian Consumer Services
Joanne Leahy, PR Manager - 020 3042 4089 / Joanne.leahy@uk.experian.com

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About Experian
Experian is the leading global information services company, providing data and analytical tools to clients around the world. The Group helps businesses to manage credit risk, prevent fraud, target marketing offers and automate decision making. Experian also helps individuals to check their credit report and credit score, and protect against identity theft.

Experian plc is listed on the London Stock Exchange (EXPN) and is a constituent of the FTSE 100 index. Total revenue for the year ended 31 March 2014 was US$4.8 billion. Experian employs approximately 16,000 people in 39 countries and has its corporate headquarters in Dublin, Ireland, with operational headquarters in Nottingham, UK; California, US; and São Paulo, Brazil.

For more information, visit http://www.experianplc.com.