Most affordable mortgages in eight years

Home loans are at their most affordable in eight years. But are they available? Robert Powell takes a look...

And the 2011 award for stating the bleeding obvious goes to...

The Financial Services Authority (FSA) for the fantastically dull first core proposal of this week’s long-awaited Mortgage Market Review: “Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay.”

Oh is that how borrowing money works?

Yes, the FSA has made a bid to put “common sense at the heart of mortgage lending” by – among other things – laying out proposals to ensure that the possibility of interest rate rises are incorporated into all customer affordability checks. And indeed, looking at the latest figures from the Council of Mortgage Lenders (CML), it certainly seems that mortgage rates have hit something of a sweet spot.

Affordability

The CML’s stats show that mortgages are at their most affordable for nearly eight years. Monthly mortgage payments for first-time buyers now typically consume 12.3% of income – the lowest percentage since January 2004.

Affordability for movers has also improved. This group now spends an average of 9.2% of their income on mortgage interest. That’s the lowest level since this measure began in 2002.

This increased affordability has been brought about by the persistence of low interest rates. Mortgage prices reached a 23-year low back in July and while they have risen marginally since then, they are still historically cheap.

But while affordability may be peaking, mortgage activity remains stagnant.

Availability

The CML figures also show a decline in mortgage transaction levels. In October 44,500 loans for home purchases were advanced - that’s down from 48,200 in September and 46,900 in the same month a year ago.

Remortgage loan levels are also down. 28,900 were issued in October, totalling £3.6 billion. That’s just over 5,000 fewer than in September.

So while mortgages may be very affordable, they’re still not that available. Here are four reasons why:

Economic confidence

A report by the Royal Institute of Chartered Surveyors (RICS) pins the blame for the continuing sluggish nature of the housing market on the shady economic outlook currently engulfing the globe.

As I considered in last week’s video report, the key issue is confidence. The British borrowing public are not (on the whole) completely confident in the security of their jobs, the stability of the British economy or that the impact of the eurozone crisis will not spread to our shores.

But the fragile global economy is not just affecting borrowers.

Available finance

RICS points to a lack of available mortgage finance as the second key factor that is holding back any meaningful housing market recovery. This is in part a direct result of the waning economy, as well as a consequence of the measures brought in to prevent future banking collapses.

On a very basic level, large outflows of cash from lenders over the past few years mean that there quite simply isn’t the money to lend to prospective home owners. What's more, tighter regulation over the amounts of capital required to be held by lenders – brought in to prevent, or at least limit future crisis – also restrict the amount of loans that banks and building societies are able to issue.

And these financing restrictions mean that lenders are now far pickier over who they lend to.

Credit records

All lenders will credit score mortgage applicants to assess their risk profile and ability to repay. Your credit score is mainly based on your historical interaction with credit products. So if you have missed credit card repayments, or received county court judgements, you may well find yourself refused further funds.

However credit scores span a spectrum. And the problem with many low-interest, best-buy mortgages is that they will in reality only be available to those with a perfect credit history. It’s not always that easy to suss out a lender’s criteria for sure. Your best bet is to always check the mortgage provider’s online affordability calculator and speak to a broker before applying for any product.

Deposit and fee levels

Despite pointing to an increase in affordability, the CML stats do highlight a hold at 20% in the average deposit needed for first-time buyers. Indeed, a look at the tables below shows a real step change in interest rate around the 80% loan-to-value boundary.

In a low-interest, high-inflation climate, getting together this level of deposit is a problem for many prospective homeowners. Indeed, it’s no surprise that over the past few years the average age for a first-time buyer has crept up above 30.

Mortgage fee levels are also an issue. According to moneysupermarket.com, they have risen by 30% in the past year. The loftiest of fees are often reserved for the cheapest interest rate mortgages, boosting their overall cost and adding to the initial outlay for first-time buyers.

Charge levels are especially pricey for short-term mortgages. When putting together the below tables I could barely find a single two-year fixed or tracker with a total fee of less than £999. As if you needed any other reason to avoid short-term deals in the current climate; read this article to find out more.

Ten tremendous fixed rate mortgages

But if you can get a deposit together and your credit record is in fine shape, here are ten fixed and ten variable mortgages that may well fit the bill...

Ten top variables

More: Bid to end risky mortgage lending | The housing market's biggest problem | 16 mortgages borrowers cannot afford to ignore

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online.

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call freephone0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.