According to new research from Bank of Scotland, across the UK, mortgage affordability for both first time buyers and homemovers in Q4 2016 was lowest in Scotland with payments equating to 19.8% of disposable earnings, compared to 29.7% for the UK.
The most affordable Local Authority District (LAD) in Scotland is also the UK’s most affordable. Mortgage payments in West Dunbartonshire sat at 15.4% of disposable income for this area in Q4 2016. North Lanarkshire (15.6%), East Ayrshire (14.6%), Renfrewshire (16.6%), Inverclyde (16.8%), Stirling (17.0%) and Falkirk (17.2%) also dominate the UK’s ten most affordable LADs.
Although the majority of Scottish LADs have seen a slight increase in the amount of earnings devoted to mortgage payments when compared to Q4 2015, mortgage affordability in Scotland has improved by 17.5 percentage points since reaching a peak of 37.3% in Q3 of 2007. Historically low mortgage rates have been the main driver behind the significant improvement in affordability since 2007.
Despite average Scottish house prices growing by 9% in the past year, mortgage affordability in Q4 2016 rose only marginally from a year earlier, rising from 19.4% to 19.8%. However, this is comfortably below the long-term Scottish average of 28.5%2. This proportion has stayed low due to further falls in mortgage rates during 2016, from an average of 2.49%1 in Q1 to 2.17%1 in Q4.
Improvements in mortgage affordability in nearly all areas since Q3 2007
There have been improvements in affordability in all Scottish LADs since 2007. Mortgage payments as a proportion of average earnings have fallen by at least 15% in 21 areas. East Dunbartonshire has seen the smallest change in mortgage affordability since 2007, falling 12.8% during that time.
The largest improvement in mortgage affordability was seen in Inverclyde where mortgage payments as a proportion of disposable earnings fell by 20.1% since 2007 (36.9% to 16.8%). Although they are two of the least affordable LADs in Scotland, East Lothian and Midlothian, were close behind, having both reduced by 18.2% over the same period.
Clear north / south 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 current rate is above its long-term average.
Low rates continue to keep mortgage affordability under control for first time buyers and homemovers alike
The proportion of disposable earnings devoted to mortgage payments by a first-time buyer in Scotland stood at 23%3 in 2016 Quarter 3; this is below the long-term average2 of 27%. This is a substantial improvement since 2007, when this figure reached a peak of 36%.
Record low mortgage rates have helped reduce this cost as a proportion of homemovers’ overall outgoings. In Quarter 4 2016, mortgage payments in Scotland accounted for 28%3 of homemovers’ disposable earnings – below the long-term average2 figure of 35%. This is a substantial improvement since the peak in 2007, when average mortgage outgoings accounted for 48% of homemovers’ disposable income.
Graham Blair, Mortgage Director at Bank of Scotland, commented: "Scottish homeowners have seen a decent improvement in housing affordability since 2007 as record falls in mortgage rates have offset higher house prices. As a result mortgage payments account for a lower proportion of disposable earnings than anywhere else in the UK.
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 £225 when compared to payments in 2007.”