Historically low mortgage rates are the main driver behind a significant improvement in affordability for home borrowers in the UK since 2007, new research shows.
Mortgage affordability, that is the proportion of income spent on home loan payments, has remained well below the peak of 2007, according to the study from lender the Halifax, up 18% in the last decade.
Typical mortgage payments for new borrowers, both first time buyers and home movers, at the historic average loan to value ratio stood at 30% in the fourth quarter of 2016 compared to the peak of 48% in the third quarter of 2007.
Despite average house prices growing by 7% in the past year, mortgage affordability in the final quarter of 2016 was unchanged and comfortably below the long term average of 35%. This proportion has stayed low due to further dip in mortgage rates during 2016, from an average of 2.49% in the first quarter to 2.17% in the fourth quarter.
The research shows that the significant improvements in affordability is nationwide with mortgage payments falling by at least 40% as a proportion of average earnings in 10 areas and 60% of all districts have seen an improvement of at least 15% over the period.
The greatest improvements were mostly in Northern Ireland, where housing affordability has improved due to a significant fall in house prices which are 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 the fourth quarter of 2016, followed by Lisburn and Castlereagh from 69% to 19% and Causeway Coast and Glens from 68% to 20%.
In England, the most significant improvement has been in South Buckinghamshire where the proportion of average disposable earnings devoted to mortgage payments has fallen from 96% to 51%, a reduction of 45% since 2007.
However, there are seven areas where affordability on this measure has deteriorated since the third quarter of 2007, including Mole Valley in Surrey where it has gone from 57% to 65%, the London boroughs of Waltham Forest from 52% up to 56% and in Harrow from 58% to 63%. The report points out that these areas have seen significant house price growth in the range of 46% to 88% since 2007.
The research also reveals a clear North/South divide. Mortgage payments are at their lowest as a proportion of disposable earnings in Scotland at 19%, Northern Ireland at 20%, the North of England at 23%, Yorkshire and the Humber also 23% and the North West 24%.
Payments are highest in relation to earnings in Greater London at 49%, the South East at 41% and the South West at 34%. London is the only region where the current rate is above its long term average.
The proportion of disposable earnings devoted to mortgage payments by a first time buyer stood at 32% in the third quarter of 2016, in line with the long term average of 34% and 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 home movers’ overall outgoings. In the fourth quarter of 2016, mortgage payments accounted for 38% of home movers’ disposable earnings, close to the long term average figure of 40% and a substantial improvement since the peak in 2007, when average mortgage outgoings accounted for 57% of home movers’ disposable income.
‘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,’ said Martin Ellis, housing economist at Halifax.
‘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,’ he added.
