Rising debt leaves first-time house buyers in south England stretched further than northern borrowers

Higher house prices and stagnant incomes are leaving first-time house buyers in south England increasingly submerged in debt compared to their northern counterparts, said Moody’s Investors Service.

“Our analysis shows that most first time buyers’ mortgage debt is over three and a half times their income in south England, whereas this ratio is up to 30% lower in the north. Mortgage accessibility is restricted for first time buyers, who need up to 15% higher deposits in some cases, compared with nonfirst-time buyers,” said Steven Becker, an analyst at Moody’s.

“Higher leverage leads to more pronounced credit risk. Alongside higher loan-to-value ratios, this weighs on loan performance and reduces the likelihood of recoveries if the underlying property is repossessed,” added Greg Davies, an Assistant Vice President at Moody’s.

Borrowers who bought a home in the south of England over the past two years are more leveraged than their Northern counterparts, with up to 30% higher loan-toincome (LTI) ratios.

In the south, loan-to-value ratios are up to 23% higher for first-time buyers compared to experienced buyers. That said, while mortgage spending is highest in the south, so are incomes.

In Scotland in Q2 2007, single-income borrowers would have needed about 40% equity to buy a property, with an average house price of about GBP145,600 for the region, and a median income of about GBP23,100, according to ONS. However, double-income borrowers would have only needed about 1% equity. House prices have since decreased to about GBP133,700 in the region, with a rise in median income of about 20% over the same period, according to ONS. Therefore, single-income borrowers would today only need about 7% equity (subject to banks’ underwriting polices including maximum LTV levels).

The data for double-income borrowers in north east England shows an implied equity surplus at about 80% as of end 2015. For double-income borrowers based on affordability only - not considering any LTV limits - the positive values mean that their combined income is sufficient to (1) purchase a property worth the average house price; and (2) allow them to access the funds for properties that are 80% higher than the average house price in the region.

First-time buyers now borrow over longer periods of time to reduce the average mortgage spending. For example, their mortgage terms are up to five years longer compared with experienced buyers. Overall, the weighted-average loan term in the UK is 28 years for first-time buyers, compared with 23 years for experienced buyers.

“Londoners have the toughest time getting on to the property ladder, as only high earners have access to the mortgage market. The London median total income observed in the pools used to obtain a mortgage is 2.4x than the London median annual salary,” added Davies