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The north/south divide in mortgage debt

The north/south divide in mortgage debt

Category: Mortgages

Updated: 09/04/2014
First Published: 09/04/2014

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Figures released from the Council of Mortgage Lenders (CML) have revealed a clear north/south divide in terms of mortgage debt, with those in the north actually having far less in outstanding loans than their southern counterparts.

The figures, compiled using data from eight of the UK's biggest lenders, showed that the total value of outstanding mortgage loans at the end of September 2013 amounted to £897bn – £229.5bn, of which was secured against properties in London. Properties in the north east, meanwhile, accounted for just £26bn (or 3%) of all outstanding debt.

This is perhaps unsurprising given the sheer pace of house price growth in the south. Latest figures from Nationwide showed that house prices in Londonrocketed by an average of 18% in the last year, putting the average property price in the capital at £362,699. Conversely, average prices in the north are just £119,702, clearly highlighting the north/south divide and the potential reason for such stark differences in debt.

However, despite those in the north having less outstanding mortgage debt, they're also more vulnerable to a rise in interest rates. Academic research from Alla Koblyakova, of the School of Architecture, Design and the Built Environment at Nottingham Trent University, found that northern households were more than twice as likely to hold a variable rate mortgage compared to their southern counterparts.

The research found that those in the north had a 78% likelihood of holding a variable rate mortgage compared to 35% in the south, and that means they wouldn't be protected should an increase in base rate hit the market.

Arguably, borrowers in the north are more likely to choose variable rate mortgages because they're typically on lower incomes and are therefore attracted to the lower initial rates and higher loan amounts offered by variable loans. However, while those on fixed rates will be initially protected should a rate rise hit, those on variable rates will see an immediate increase in payments – and with a rise of 1% potentially meaning an increase of around £175 per month on an average variable rate mortgage, according to Ms Koblyakova's calculations, it has the potential to hit the poorest households the hardest.

It could also have implications for lenders, particularly as households in the north are more likely to be in negative equity, and could therefore make lenders more vulnerable for losses should tighter regulations and higher interest rates lead to defaults.

"It is very important that policymakers are fully aware of this when considering future monetary policy decisions, as an increase in interest rates is likely to affect poorer regions much more severely than others… As variable-rate mortgages are more sensitive to financial shocks, it is a matter of national economic concern that there is such a geographical imbalance in the way that mortgages are distributed in the UK," said Ms Koblyakova.

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