Mortgage Rates: From Bad to Worse?
Today’s blog is by Stephen Smith, a non-executive director and consultant in financial services, with 40 years experience in the mortgage industry. He joined us on Friday 4th November for a deep dive into the current economic turmoil, so be sure to watch the replay!
Are buyers in a worse position now than in the 1980s?
A hot topic of discussion between families and friends of different generations is whether the current level of mortgage interest rates is anything to be concerned about, compared with the 15%+ rates seen in the 1980s and 1990s.
Many older people, who may have bought their homes twenty or thirty years ago don’t see what the fuss is about, considering their own experience. Younger folks, who have recently purchased or are still saving up for a huge deposit know the reality of the situation.
House price growth in the UK has far outstripped general inflation and the rate of wage growth. To give you one example, based on Land Registry data, back in 1990 average household income was around £20,500 and the average house price was £58,000 – that is 2.8x the household income.
By 2020 the average household income had grown to £37,100 but the average house cost £238,000 – that is 6.4x annual household income. More than double.
In pound notes, a 10% deposit in 1990 of £5,800 had become £23,800 by 2020 – as a proportion of annual household income grown from 28% to 64%. And the 90% loan to value mortgage to be borrowed has grown from £52,200 to £214,200. Apply even low interest rates against these huge current borrowing figures and you can see that the actual drain on household income is very similar to the worst days of 15%+ rates back in the day.
A 4% rate today equates to a rate of over 14% in the 1990s. That is what the fuss is about.
Can young people benefit from the Bank of Mum and Dad?
Given this rise in prices, coupled with the high level of rents in the private rented sector making it hard for prospective first time buyers to save up a deposit, it is not surprising that something has had to step in to give support.
Into this space has come the Bank of Mum & Dad, and increasingly the Bank of Granny and Grandpa. This is not a Government initiative and nothing has been set out by the regulator – it is simply people and families themselves working out ways to help the next generation of homebuyers get onto the housing ladder, typically by way of a gift.
Research from the property group Savills and also by Legal & General shows that over half of first time buyers in recent years have received support towards their deposit from family, mainly from parents, but with an increasing number of grandparents also helping. Around one in four grandparents say that they are planning to help their grandchildren in this way, giving an average of over £30,000 according to recent research by Aviva in their ‘Age of Ambiguity’ report.
In many ways, the Bank of Mum & Dad is a good thing. It cascades wealth between generations and enables that step onto the first rung. But in other ways, it is causing and deepening the social divide in our country.
If you are born into a housing wealthy family then you are likely to be able to get into owner occupation yourself, but if not, then it is going to be very difficult to save up the deposit needed in most areas of the UK. And in economic terms, the Bank of Mum & Dad acts as a demand side stimulus in the housing market – allowing more people to buy – against a limited resource, the supply of housing, and thus it contributes to price rises. And so the divide continues to widen.
Are there alternatives to the Bank of Mum & Dad?
Faced with this market challenge, mortgage lenders have been quite innovative.
Schemes to provide an alternative to Bank of Mum & Dad fall into two broad categories:
- Schemes which require the support of family members
- A new set of schemes, typically from new lenders, where first time buyers without family support can get help
As with all more complicated mortgage schemes, it is really important to get advice, so do speak to a mortgage broker.
Family support schemes
Guarantor mortgages have existed for many years. In these, someone, typically a parent, is legally joined in the mortgage to ‘guarantee’ that payments will be met. But today’s schemes have developed well beyond this.
The Halifax ‘Family Boost’ mortgage involves a family member depositing up to 10% of the purchase price in a three year fixed rate savings account. The first time buyers can then proceed without a 10% deposit, and they are the only ones named on the mortgage documents and legal title. At the end of the three year period the family member can get their savings back, with interest, as long as all the mortgage payments have been met.
Barclays ‘Family Springboard’ mortgage works in a similar way, although the savings lock in is for five years. Several other larger lenders offer variations on these schemes.
Some smaller lenders have taken a different approach. Instead of family members having to find the money and lock it up for a period of time, they can give a charge over their own homes as additional security to a 100% loan taken out by the first time buyers. A charge of up to 20% is taken and is again locked in for a period of years, after which it is released as long as the first time buyers have made their payments. A number of smaller societies such as the Mansfield Building Society and the Beverley Building Society offer these ‘Family Assist’ schemes.
A further innovation has been the development of ‘Joint Borrower Sole Proprietor’ mortgages which allows a parent or other family member to contribute to the monthly payments on their child’s mortgage without being a co-owner of the property, thus avoiding stamp duty complications. This can increase the income taken into account when the lender determines how much it can lend.
Several building societies offer this scheme, including Skipton, Newcastle and the Principality as well as a couple of larger lenders, Metro Bank and Barclays.
New lender schemes
Further innovation has been brought to the market by a number of new companies, with products to help those without large deposits leverage what they have. Generation Home offers schemes which they say can ‘boost’ either the deposit or the income of the buyer.
Another company, called Even offers to lend a sum to increase the deposit that the first time buyer has by way of a second charge equity loan, linked to how house prices perform in the future.
These schemes are all more complicated than the traditional route to buying a home, so advice is definitely needed. Buying a first home has always been difficult, but it is particularly difficult at the moment and first time buyers deserve some sympathy. But with the Bank of Mum & Dad and these innovations from mortgage lenders, help can be on hand.