‘Most affordable’ mortgages offset by house price growth

New research from Halifax found homeowners spent less than a third (29 per cent on average) of their disposable income on mortgage payments in the fourth quarter of 2017, compared with almost half (48 per cent) in 2007 (Q3). 

However, with average house prices rising 3 per cent in the past year, mortgage affordability has actually edged down slightly from the 29.6 per cent measured in 2016.

In fact, Halifax found affordability has worsened over the past five years as average house prices rose.

While the average mortgage rate has fallen from 3.7 per cent in 2012 to 1.98 per cent at the end of 2017, average house prices have grown 40 per cent in the same period, it said.

As a result, 89 LADs have seen mortgage cost as proportion of disposable earnings rise by at least 5 per cent.

In Elmbridge in the South East, for instance, affordability has deteriorated from 34 per cent to 56 per cent with an average of 22 per cent more disposable earnings devoted to mortgage payments. 

The Bank of England made the first base rate rise in a decade to 0.5 per cent last November.

However the Halifax research found in terms of the actual cost of borrowing, thjere have been improvements in affordability in almost all local authority districts (LADs) since 2007, with mortgage payments falling by at least 30 percentage points as a proportion of average earnings in 35 areas. 

Three-quarters (74 per cent) of all districts had seen an improvement of at least 15 percentage points over the period, it said.

But the lender pointed to disparities across the regions with Northern Ireland (19 per cent of disposable income spent on a mortgage), Scotland and the North (both 20 per cent), Yorkshire and the Humber and the North West (both 23 per cent), faring better than southern regions such as Greater London (45 per cent), the South East (40 per cent) and South West (34 per cent).

Andy Bickers, mortgage director at Halifax, said: "This is a real boost for both those who already have a mortgage and those preparing to take their first step on to the property ladder. 

“Improved mortgage affordability has been a key factor supporting housing demand and helping to stimulate the modest recovery that we are currently seeing.”

Halifax has seen the number of first-time buyers and homemovers purchasing a home with a mortgage bounce back towards 2007 levels in recent months, it said.

Affordability was helped by a dip in mortgage rates during 2017 from an average of 2.09 per cent in Q1 to 1.98 per cent in Q4, keeping the cost to disposable capital ration down below the long-term average of 35 per cent.

David Hollingworth, associate director of communications at L&C Mortgages, said: “Low mortgage rates have helped borrowers in terms of affordability and many will have been able to cut the proportion of their disposable income being spent on their mortgage, especially where they’ve shopped around for a better deal.

“However, that will also help underpin confidence in taking on a larger mortgage debt to meet higher house prices, which can to a degree become something of a vicious circle.”

He said if more buyers have had to push to the outer limits of their affordability they will ultimately be constrained by their maximum borrowing capacity, which was an important factor when looking at potential further rate rises. 

He also said house price growth could be slowing: “Rates remain low and supply is low which will help to maintain prices but we are seeing the rate of house price growth diminish generally, something that is inevitable as prices move out of reach of more and more prospective buyers.”

10 Most Affordable local areas, 2017 Quarter 4

Sources: Halifax, ONS, Bank of England

10 Least Affordable Local Areas, 2017 Quarter 4

Sources: Halifax, ONS, Bank of England   

carmen.reichman@ft.com