For young, aspiring home-owners seeking a mortgage, it seems to be a case of “heads you win, tails I lose”.
According to one recent national newspaper report, a mortgage price war has broken out with some lenders prepared to offer deals with annual interest rates of under 1 per cent in some cases.
The buy-to-let sector is responding to, rather than creating, a housing need
The only problem is that to take advantage of such a rate, a borrower might need to produce a deposit of 40 per cent of the purchase price.
• READ MORE: David Alexander: Buy-to-let pain for long-term gain
According to the same report, the average rate for someone taking out a mortgage with a deposit of just 5 per cent will pay a rate, on average, of 4.18 per cent – and from what I hear out on the property street, mortgage acceptances with 5 per cent deposits are rather thin on the ground.
A quick look at some mortgage deals currently being offered by mainstream lenders showed one or two prepared to offer 90 per cent mortgages but more commonly the maximum was 65 to 75 per cent.
So given the difficulty faced by young people to get on the housing ladder, the parrot cry of politicians and associated commentators is that we should “build more homes”. True, in purely arithmetical terms there is probably a shortage of suitable homes available to buy or to rent in relation to underlying demand.
However, building a sufficient numbers of properties to meet demand will not, in itself, make homes immediately more affordable. Yes, additional stock will obviously create more competition for business among mortgage lenders but, this will lead to even more competitive interest rates – not necessarily lower deposits.
The reason for today’s high deposits is down to fairly cavalier lending by the banks and building societies (but especially the former) over a long period until 2007/8. Back then mortgages with a LTV (loan to value) rate of up to 125 per cent were offered, leaving these institutions highly vulnerable to holding billions of pounds in toxic debt when property values crashed… as they did in many locations.
As a consequence, the lenders, with some prodding from the Financial Conduct Authority, have done a complete volte face and apart from requiring large deposits, are going through every mortgage application with a fine-tooth comb.
Hence the large number of professional couples in their twenties – both in relatively safe jobs and earning good money – who are still renting, whereas back at the turn of the 21st century people in this group would, typically, have already moved on to owner-occupation.
Some do have recourse to the much-vaunted “bank of mum and dad”, but not every parent is able to help. Mum and dad could, on paper, be worth over £1 million but much, perhaps most, of this will be tied up in the equity of their home and in pension pots. As for the much-anticipated windfall from the sale of gran’s bungalow, that’s being rapidly eaten up by the cost of care home fees.
Even when affordable, the sums involved are fairly substantial. Back in the 1980s parents might give their offspring a leg-up to home-ownership by, for example, meeting the cost of solicitors’ fees; now, chipping in half the 30 per cent deposit on a new-build flat costing £200,000 would set mum and dad back £30,000.
There may be some justification in the claim that demand from buy-to-let landlords has driven up prices and made owner-occupation less affordable for first-time buyers, but this has to be compared to the change in the mortgage lending culture.
To a large extent, therefore, the buy-to-let sector is responding to, rather than creating, a housing need. In another recent report, insurer Aviva found that the number of people aged between 25 and 34 in the UK still living with their parents had risen by 331,000 to 1.23 million in just a decade.
Given the circumstances mentioned above, this figure, I contend, would be even greater were it not for a buoyant residential rental sector.
• David Alexander is managing director of DJ Alexander