Affordability improves sharply over the last year

The salary of the average homebuyer fell 16% year-on-year in June to £34,584, as improved mortgage affordability boosted lower income borrowers.

The reduction in mortgage rates has given average annual saving of £780 on repayments, but the prospect of a rate rise threatens to erode potential savings.

The latest National Mortgage Index from the Mortgage Advice Bureau suggests that record low mortgage rates have improved access to the housing market for lower earners as lenders have become more comfortable working within new affordability rules.

The average primary salary of mortgage applicants peaked at £41,106 one year ago in June 2014, shortly after the introduction of the Mortgage Market Review (MMR).

By June this year, the typical primary income for a borrower had fallen to just £34,584, down 16% and the lowest figure since August 2011.

This fall in average salaries comes despite a 6% increase in the size of the average purchase deposit since June 2014.

Purchase applicants put forward an average deposit of £75,625 in June 2015, up from £71,474 year-on-year.

As a result, average LTVs dipped from 69.8% in June 2014 to 69.2% last month, as homebuyers borrow less in relative terms and shoulder more of the cost of their purchase themselves.

The typical purchase deposit represented 1.74 times the average buyer’s primary salary in June 2014. This has since risen to 2.19 times salary.

Mortgage rates continue to fall, saving borrowers £65 a month compared to last year

Using data from Moneyfacts.co.uk, the Index shows the average rate for a two year fixed mortgage in June was 2.87%, down from 3.61% in June 2014, a fall of 74 basis points (bps).

Five-year fixed rates averaged 3.38% last month, down from 4.14% in June 2014, a drop of 76bps.

As a result of more competitive pricing, homebuyers with a mortgage stand to save an average of £65 on their monthly bill compared to a year ago, or £780 a year.

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Borrowers have been the winners in the mortgage market over the past 12 months.

“Although some lenders may initially have been over-cautious following the introduction of the Mortgage Market Review (MMR), a number have since adapted to the rules and become more flexible in terms of affordability.

“At the same time, mortgage rates have plummeted, leaving borrowers with cheaper monthly bills and making homeownership a more affordable prospect."

Murphy warned an early interest rate hike could reverse the trend towards improved affordability.

"Although lenders thoroughly stress test household finances to ensure borrowers can cope with higher interest rates, a rise of just 0.5% could still bring mortgage bills back up to where they were a year ago.”