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UK Mortgage Rates Could Top 8%: Economist

Tuesday, 24 May 2011 | 1:32 AM ET

Home owners could be in for a nasty surprise as borrowing costs return to normal over the medium term, according to Capital Economics.

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“There is plainly a great deal of uncertainty around what will happen to spreads on mortgage interest rates when Bank Rate does eventually rise. But if current spreads were maintained, average mortgage interest rates could rise to 8 percent,” Paul Diggle, a property economist at Capital Economics, wrote in a research note.

With millions on variable mortgages and debt relative to earning so high, the cost of owning your own home in the UK would rise sharply, according to Diggle.

“At current house prices, that would see mortgage payments at the start of a new mortgage increase from 34 percent of average take-home pay to 51 percent. Initial mortgage affordability would be as stretched as it was in 2007,” he wrote.

Mortgage payments could hit 42 percent of take-home pay according to Diggle.

“Given that the potential scale of monetary policy tightening, when it does eventually come, will be greater than it has been for some time, the high level of interest rate sensitivity must add to the downside risks around the medium-term outlook for house prices,” said Diggle, who expects UK rates to remain low this year and next.

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