Economic myths: mortgage affordability

From The Evening Standard:

However, historically low mortgage rates meant that first-time buyers only had to pay nine per cent of their income as mortgage interest, the lowest proportion since records began in 1973. Interest and capital repayments combined accounted for 19.5 per cent of earnings.

The “nine per cent” figure is irrelevant. Think about it – if mortgage interest rates were zero, house prices would go up accordingly and annual repayments would remain the same. What matters is total repayments and for how long.

The blue line in this handy chart from Savills shows that twenty per cent for the first year is par for the course (remembering that this is calculated on gross income before tax; it is more like one-third of net income). Interest is like privately collected land value tax, a reduction in the tax rate benefits landowners and sellers, not buyers.

For more important is the red line, which shows that in the good old days of high inflation, your mortgage was being eroded away and your payments in real terms fell quite markedly. This is what the oldies conveniently forget.

A final point to mention is that mortgage terms are getting longer and longer, paying one-fifth of your gross income for ten or fifteen years is fair enough; paying it for thirty years is not.