New analysis of housing debt shows how different mortgage constraints affect different areas of Britain.
While northern England and Wales have higher average outstanding loan-to-value mortgages, London and the South East have the highest average loan-to-income ratios. But, the markets exposed to both are most at risk when rates rise.
On average, British mortgaged owner occupiers have an outstanding loan-to-value of 48 per cent, ranging from 39 per cent in London to 60 per cent in the north east of England, despite the fact that the total value of mortgage debt in London is more than six times higher.
Owner occupiers in London have benefited from strong price growth post-credit crunch, which has added substantially to their net housing wealth. In contrast, residential property in the North East carries a much higher level of debt relative to the underlying value of the assets on which it is secured, due to lower longer term price growth and a much more muted performance over the last 10 years.
This variation is even more pronounced at a local level: in Burnley the average outstanding loan to value among owner occupiers with a mortgage is 88 per cent, while in Camden it is just 15 per cent.
Interactive map showing average loan-to-value ratios across the country:
While looking at loan to value demonstrates the equity cushion in various markets, it doesn’t explain how far those with a mortgage are stretched relative to their income. Analysing how the average level of outstanding mortgage debt compares to the average household income (assuming two average earners) helps to explain this.
Loan-to-income ratios are more stretched in London despite the higher equity cushion. Consequently, the capital will be more constrained by mortgage market review and increased interest rate rises. This will particularly affect younger owner occupiers, who are relatively new to the market and have stretched themselves on higher loan to incomes.
On the other hand, some of the markets with the least equity are less affected by affordability constraints as they have lower loan-to-income multiples, but people’s abilities to trade up the housing ladder may be limited by a lack of accumulated equity to put down as a deposit.
Interactive map showing average loan-to-income ratios across the country:
The markets most exposed to rate rises, and conversely most protected by ongoing low interest rates, are those with a combination of relatively high outstanding loan-to-income and high loan-to-value ratios. These include the likes of Newham, Crawley, Barking and Dagenham, Tower Hamlets, Harlow, Worcester, Watford, and Slough.
At the other end of the scale are the likes of West Somerset, Camden, Eden, Copeland, Richmondshire and north Norfolk, where outstanding levels of debt are much less of a constraint. Kensington and Chelsea and Westminster also fall into this list, though their markets are affected much more significantly by issues such as stamp duty.