Mortgage affordability reaches 16-year low

In such uncertain financial times, it seems that prices are rising at every turn. Nowadays, if you go to your local supermarket you can expect to pay well over the odds for a pint of milk or a loaf of bread - whether down to illegal supermarket price-fixing or not.

According to the latest official statistics, food prices - driven mainly by bread - jumped by 6.6 per cent on the year, the highest rate since July 1993.

We have all seen massive rises in the price of petrol also in recent months, skirting dangerously close to the £1 per litre mark. Petrol prices rose by 18.5 per cent on the year - the biggest increase since July 2000 - due mainly to the price of oil surging to near $100 a barrel.

Despite slow price growth in the UK housing market, house prices are still generally out of the reach of first-time buyers, making it increasingly difficult for them to get onto to much sought after property ladder.

The cost of raw materials also shot up quite sharply in November, indicating that inflation pressures are mounting despite signs that the economy may be slowly grinding to a halt.

This dismal situation is made all the more worse by a serious dearth of housing - which the government has pledged to sort out by 2015.

The recent interest rate cut by the Bank of England to 5.5 per cent - the first cut in over two years - was seen as a much-welcomed relief for mortgage holders, who can now expect slighter cheaper monthly mortgage payments and cheaper borrowing.

But according to new figures from the Council of Mortgage Lenders (CML), homeowners are putting the highest percentage of their salaries towards mortgage interest payments in 16 years.

Rising house prices and interest rates this year have significantly pushed up the proportion of income needed to service a mortgage. First-time buyers used an average of 20.6 per cent of their income just to pay mortgage interest in October.

This is the highest level since 1991, when home-movers were putting a mere 17.6 per cent of their pay towards monthly mortgage payments.

We had all been hoping that the Bank of England would graciously cut interest rates again. Indeed, some financial commentators had speculated that we could all expect two more interest rate cuts over the next year.

These hopes have been dashed because analysts say that in the light of new data that shows a general hike in prices, the monetary policy committee will be more cautious of making further interest rate cuts in the near future.

"The producer price inflation data highlights the fact that the Bank of England needs to be confident that slowing growth is diluting underlying inflationary risks before trimming interest rates further," Howard Archer, economist at research group Global Insight told the Guardian.

According to the CML, just under a third of consumers are choosing variable rate mortgages in the hope their repayments will come down in line with falling interest rates.

Hopefully, the Bank of England will reduce rates further somewhat so this trend of Brits being unable to afford mortgages will start to reverse itself.