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Mortgage affordability improved significantly over past decade

6th February 2017 Print

Mortgage affordability levels have remained significantly below the peak of 2007 almost a decade on, new Halifax research has revealed. 

Mortgage affordability – the proportion of disposable earnings devoted to mortgage payments – has improved by 18 percentage points since reaching its peak in 2007. Typical mortgage payments for new borrowers (both first-time buyers and homemovers) at the historic average loan to value ratio1 stood at 30% in Q4 2016 compared to the peak of 48% in Q3 2007.

Historically low mortgage rates have been the main driver behind the significant improvement in affordability since 2007.

Despite average house prices growing by 7% in the past year, mortgage affordability in Q4 2016 was unchanged from 2015 at 30%.This is comfortably below the long-term average of 35%2. This proportion has stayed low due to further dip in mortgage rates during 2016, from an average of 2.49%1 in Q1 to 2.17%1 in Q4.

Significant improvements in mortgage affordability in nearly all areas since Q3 2007

There have been significant improvements in affordability in almost all local authority districts since 2007, with mortgage payments falling by at least 40% as a proportion of average earnings in 10 areas. Almost two thirds (60%) of all districts have seen an improvement of at least 15 percentage points over the period.

The greatest improvements were mostly in Northern Ireland, where housing affordability has improved due to a significant fall in house prices, now 40% lower than in 2007.

In North Down and Ards mortgage payments as a proportion of disposable earnings have fallen by more than half (from 73% to 21% in Q4 2016), followed by Lisburn and Castlereagh (69% to 19%) and Causeway Coast and Glens (68% to 20%).

In England, the most significant improvement has been in South Bucks where the proportion of average disposable earnings devoted to mortgage payments has plummeted from 96% to 51%, a reduction of 45 percentage points since 2007.

However, there are seven areas where affordability on this measure has deteriorated since Q3 2007, including Mole Valley in Surrey (from 57% to 65%), and the London boroughs of Waltham Forest (52% up to 56%) and Harrow ( from 58% to 63%). These areas have seen significant house price growth in the range of 46% to 88% since 2007.

Clear north / south mortgage divide

Mortgage payments are at their lowest as a proportion of disposable earnings in Scotland (19%), Northern Ireland (20%), North (23%) and Yorkshire and the Humber (23%) and the North West (24%).

Payments are highest in relation to earnings in Greater London (49%), the South East (41%) and the South West (34%). London is the only region where the current rate is above its long-term average.

Eight out of the 10 most affordable local areas are in northern Britain, whilst the 10 least affordable areas are all in the South.

Seven of the 10 most affordable local authority districts are in Scotland, with West Dunbartonshire, North Lanarkshire and East Ayrshire among the most affordable local authority districts in the UK. There, typical mortgage payments account for 16% of average local earnings in all areas.

The remaining most affordable areas in the top 10 are Copeland in Lancashire (16%), Merthyr Tydfil (17%) and Blaenau Gwent (17%), both in Wales.

Unsurprisingly, the 10 least affordable areas are predominantly in London. Haringey is the least affordable local authority district in the country, with average mortgage payments on a new loan accounting for 68% of average local disposable earnings, followed by Brent (66%), Mole Valley (65%) and Camden (65%).

Low rates continue to keep affordability under control for first-time buyers and homemovers

The proportion of disposable earnings devoted to mortgage payments by a first-time buyer stood at 32%3 in Q3 2016 – in line with the long-term average2 of 34%. This is a substantial improvement since 2007, when this figure reached a peak of 50%.

Record low mortgage rates have helped reduce this cost as a proportion of homemovers’ overall outgoings. In Q4 2016, mortgage payments accounted for 38% of homemovers’ disposable earnings – close to the long-term average2 figure of 40%. This is a substantial improvement since the peak in 2007, when average mortgage outgoings accounted for 57% of homemovers’ disposable income.

Martin Ellis, housing economist at Halifax, said: “Looking back almost a decade, there has been a considerable improvement in housing affordability across the country, which has been maintained over the past year as further falls in mortgage rates have offset the effects of higher house prices.

“The significant reduction in mortgage payments by a typical borrower has resulted mostly from record low rates that have provided monthly savings of, on average, around £220 in 2016 compared to a peak monthly payment of £888 in 2007.”