More and more unconventional home loans are being launched, which is taking the mortgage market into dangerous territory.
Every month, figures from the Bank of England show that the UK's mortgage debt continues to soar. Here's how it's exploded over the past decade:
| Year | Mortage debt (£bn) | Increase (£bn) | Growth % |
|---|---|---|---|
| 1996 | 409 | - | - |
| 1997 | 431 | 22 | 5 |
| 1998 | 456 | 25 | 6 |
| 1999 | 494 | 38 | 8 |
| 2000 | 536 | 42 | 9 |
| 2001 | 591 | 55 | 10 |
| 2002 | 674 | 83 | 14 |
| 2003 | 773 | 99 | 15 |
| 2004 | 876 | 103 | 13 |
| 2005 | 966 | 90 | 10 |
| Sept 2006 | 1,046 | 80 | 8 |
So, from December 1996 to September 2006, our mortgage debt has grown by an average of 10% a year compounded. What's more, our non-mortgage debt (including credit and store cards, overdrafts, personal loans, student loans, etc.) has shot up even faster, rising from £79 billion in December 1996 to £212 billion today, at a rate of almost 11% a year. Ouch!
The problem as I see it is that our demand for ever-greater levels of debt has far outstripped the growth in wages. Indeed, from December 1996 to September 2006, the average wage rose by 50%, which equates to a compound annual rate of a mere 4%. To be blunt, if our debts continue to rise at a faster rate than our wages, then we really will be in a pickle!
Of course, the main engine for our record borrowing binge has been soaring house prices, which have risen at a far greater rate than wages and general inflation. According to the Halifax House Price Index, the average home cost £179,425 in September, compared with just £66,094 in December 1995. That's an increase of £113,331 in 9_ years, which means that the average house price has risen by 11% a year compounded.
Of course, as house-price inflation has far exceeded wage growth, something has to give in order to enable people to keep buying homes. What seems to be happening is that mortgage lenders have abandoned all reason in an attempt to lend people enough to leap on or up the housing ladder. For example, we now have these mad mortgages on offer:
- Britannia BS this week announced that it is increasing its maximum mortgage term from thirty years to forty. Given that the typical first-time buyer is 34, this suggests that borrowers will be paying off their home loans well into retirement!
- In 2004, Britannia BS introduced its "Share to Buy" mortgage, which I slated here. Other lenders, including the normally conservative HSBC, have now jumped on this particular bandwagon, regardless of the risks involved.
- Instead of lending a conservative three to four times income, more and more lenders are queuing up to lend borrowers five, six, even seven times their pre-tax annual income in order to buy a home, as I revealed in Hazardous Home Loans To Avoid.
- Several lenders are willing to lend homebuyers more than the entire value of their home. For example, with Northern Rock's Together mortgage, you can borrow up to 125% of the property price. With a loan of this scale, property prices would have to rise by 25% for you to have no equity whatsoever in your home, which is bonkers!
- I've heard mortgage lenders argue that it's fine to lend people so much that their monthly mortgage repayments exceed half of their take-home pay. Nonsense, that's a recipe for financial meltdown!
So, we have mortgages that last a lifetime, share-to-buy loans, seven times income deals, and 130% loan-to-value offers, all aimed at fuelling an unsustainable boom in house prices. With household finances under increasing pressure, the only relief for these and millions of other borrowers comes in the form of historically low interest rates. Sadly, the Bank of England has started to hike its base rate in order to control inflation, so some heavily indebted homeowners will come a cropper over the next year.
I'm in my late thirties, so I was just leaving university when the last property crash got under way in 1990. More than anything, this glut of funky mortgages reminds me of the crazy lengths that mortgage lenders went to in the late Eighties in order to lend as much as they could to as many borrowers as possible.
As Mark Twain allegedly said, "The past does not repeat itself, but it rhymes". Hence, whenever I read press releases trumpeting our ever-increasing mortgage debt, I ask myself the same questions: what particular pin will burst this bubble? Will it be rising interest rates? Rising unemployment? Rising personal debts and insolvencies? Who knows, but as sure as day follows night, the house-price bandwagon is going to come screeching to a stop, so watch out for those red warning lights!
Finally, if you'd like an expert to search the entire market of over 8,500 mortgages to find the best deal for you, try the Fool's mortgage service. It's run by award-winning, no-fee mortgage broker London & Country Mortgages, which also has exclusive deals for Fool customers. Give it a try today!
More: Use the Fool to find better credit cards, mortgages, personal loans and savings accounts!