Financial balancing act of home ownership - David Alexander

David Alexander Head of DJ alexander

What is it about the British and home ownership? Nothing seems to diminish their desire – not recession, not higher taxes nor even the threat of conflict between the world’s nuclear-armed superpowers.

With 40 years of selling thousands of properties behind me, I have stopped being surprised at the ingenuity shown by the people of this country to realise their property ambitions.

The latest example of this phenomenon is that some home-buyers decided they would not allow the end of the stamp duty/LBTT holidays to stand in their way of moving to a larger and more expensive house; to get round the problem they simply decided to take out mortgages of more than 35 years.

Thanks to a successful freedom of information request to the Financial Conduct Authority (FCA), the wealth management firm, Quilter, found that there were 35,046 approved mortgages with a term of more than 35 years in June 2021 – the end of the first stage of the stamp duty holiday (in England). That is an increase of 209 per cent compared with 11,320 in June 2020. In September 2021, the final month before stamp duty rates reverted to their pre-pandemic levels, 28,112 mortgages were sold, a 73pc increase compared with 16,066 in September 2020.

Charlotte Nixon, a mortgage expert at Quilter believes “many people will have viewed the stamp duty holiday as an opportunity to purchase a larger, more expensive house than they would otherwise have been able to”.

But at what price?

Quilter points that that the savings on stamp duty could have been a maximum of £15,000 in the first stage and £2,500 in the second, which is substantially smaller than the amount of additional interest likely to be paid as a result of taking on a 35-year or more mortgage.

For example, the overall cost of a 35-year term on the average home in September 2021, with a 15pc deposit and a 2pc interest rate, would be £383,732, according to Quilter. Had the same property purchase been made with a 25-year mortgage, the overall cost would be £311,220 – a saving of £72,512. For the same scenario in June 2021, the overall saving would have been £66,914.

However while this information has only recently come to light, the stamp duty holiday ended at the end of September last year, which is more than six months ago, and the mortgage lending culture may have changed significantly since then.

New analysis of the English market has claimed that 32pc of property sales collapsed before completion between January and March of this year, 25pc of them falling through because the buyer struggled to secure mortgage finance.

Other reasons cited for transactions failing to conclude were buyers changing their minds and the seller pulling out due to slow progress or a change or circumstances. There were also reports about a decrease in mortgage valuations.

Now it has to be pointed out that due to the separate systems, verbally agreed but not contractually confirmed house sales are more likely to fall though in England than in Scotland.

Problems of this sort were rare in the Edinburgh the market when it began the year where it had left off, even if it soon became apparent that a slight reduction in the prices achieved for city centre properties was being balanced by increased demand in the suburbs and “commutable” towns. Coastal locations were still very much sought-after – a continuing phenomenon, perhaps, of the covid-related “race for space”.

As things stand it seems almost certain that sales activity this summer will not be as hectic as it was during the same period last year, although I’m hopeful this will turn out to be a correction rather than a depression.

Indeed the occasional correction is no bad thing, not least for the many first-time buyers who were left even further behind by the by the price boom of the past 18 months. Established home-owners who’ve benefited from a rise in property equity and are now facing a temporary freeze, might want to sit back, count their blessings and take satisfaction in seeing the youngsters given some breathing space.

David Alexander is managing director of DJ Alexander