Record debt for first time buyers in the UK spells doom

The council of mortgage released figures for July that show that first time buyers are so desperate and so stretched that they are now borrowing an average of 3.24 times their annual pre-tax income to by their first property. The average loan is now £110,000 ($206k) for these buyers.

The extent of the debt gearing is the highest since records began in 1974.

Essentially lenders are extending loans that in many cases exceed 110 percent of the asset value of the property. So far there has been no general concern expressed about the extent of the debt, though in July many of the UK’s banks set aside record amounts to cover consumer debt.

The situation in the UK is similar to the time bomb ticking with ARMs in the US.

The average first time buyers salary is estimated to be £34,216, repaying just the interest on the £110,000 loan would take up 16.7 percent of the salary at today’s interest rates after tax.

The major concern is that bank rates in the UK are currently on the up, with an expected further increase of 0.25 percent next month.

"If house prices continue to move up, the multiples facing first-time buyers will become even more daunting and they are likely to be increasingly squeezed out of the market," said Howard Archer, chief UK economist at the Global Insight consultancy.

"Furthermore, mortgage interest rate payments will rise even further should the Bank of England raise interest rates again before the end of the year, which is highly possible.

"In addition, rising unemployment and soaring utility bills are adding to the pressure on many first-time buyers.

Drew Wotherspoon of John Charcol, the UK’s leading independent mortgage adviser, said the Citizens Advice report on mortgage defaults showed that the UK’s "love affair" with home ownership was "stronger than ever".

"A mortgage is the largest financial commitment most people are ever likely to make and they should always seek professional advice on what they can and cannot afford before taking a home loan out," he said.

"Carefully considering every eventuality is an important process, which allows borrowers and lenders to determine the appropriate level of repayments."

The writing is on the wall. Each week, or even day that passes sees more ‘vectors’ aligning to indicate a sudden loss of confidence in the market. The ‘perfect storm’ is brewing for the housing market.