There’s a lot of resentment around today aimed at first-time buyers who have parents willing to stump up deposits, mainly from those whose parents do not have enough to stump up their deposits, after Legal & General found that the Bank of Mum and Dad pays for around 25% of starter home loans and now technically qualifies as a top ten mortgage lender.
That resentment is misplaced. There’s nothing wrong with inter-generational help – the problem is that the craziness of house prices means there is increasingly no choice. And the consequence of equity-rich parents offering cash boosts to their offspring, of course, is that society’s haves continue to have more housing wealth, while the have nots continue to have none.
The blame for this lies partly with interest rate policy in response to the financial crisis. During the credit crunch, mortgage lenders tightened up on the riskiest, high LTV loans – the very loans that deposit-poor first-time buyers were using to scrape onto the ladder. The lenders arguably had no choice. They were at risk of losing money on bad loans and the Bank of England was calling for greater prudence. But what happened as a result caused huge distortions in housing wealth over the next few years.
Interest rates on mortgages for the already equity rich generation of older homeowners fell to almost nothing – down from around 5 per cent on average before the crisis to as little as 1.5 per cent for those who owned at least 35 per cent of their home’s value outright. And all they had done to deserve this massive monthly income boost was to sit in a house they had had the benefit of owning for the last 10+ years. Meanwhile, the ladder was retracted for the riskier new borrowers – if they managed to get approved at all, they would have to endure much higher interest rates than their parents’ generation were paying, to reflect the perceived greater risk they posed. Such is the misfortune of being born at the wrong time.
The differential between an interest rate on a 100 per cent loan and the rate on a 65 per cent loan pre-2008 was probably around 2 per cent. After the base rate went down to 0.5 per cent, that differential widened to around 4 per cent. On a typical mortgage, this difference amounts to a few hundred pounds.
Say what you like about the risks of 100 per cent lending – at least such loans, which were stopped universally in the financial crisis of 2008, made the housing market more democratic.
But the mortgage industry rewards less risky borrowers more than ever before. Perhaps a solution to this inequality is to re-think whether first-time buyers with smaller deposits are always more risky. Because having equity doesn’t guarantee that someone will always meet their mortgage repayments. Younger people with good jobs have more chances for promotions and pay rises than older workers, for example. They are good future bets.
If mortgage lenders gave more weight to employment credentials and prospects where appropriate, they could offer lower rates at higher loan-to-value limits, making property ownership more affordable.
My loan from the Bank of Mum & Dad
Back in 2011, I got pregnant. Me and my partner (unmarried still!) were living in a one-bedroom flat in North London. We had been considering buying it, but then… duff.
We began to scour the provinces for commutable locations where starter family homes could be bought for less than £250,000. And we found Tunbridge Wells. My due date was an obvious deadline for our purchase.
The Bank of Mum and Dad (it was the Bank of Mum and Dad-in-law, actually), wanting to see us settled before their first grandchild appeared, offered us a gift of £20,000 towards the deposit. We managed to put about £6k in ourselves.
We took the offer gratefully (who wouldn’t?) But this doesn’t mean we had it easy.
This was at a time when 90% LTV mortgages were hard to get and interest on them was high. We paid a rate of 5.6 per cent for three years, while the loans of more established homeowners were between 1 and 2 per cent. After we remortgaged, our property value had increased. We moved house to a more expensive property, but found that we were able to get a much cheaper loan, although still relatively high compared to our parents’ interest rate – we now pay 3.4 per cent.
It doesn’t make sense to me that as I move up the ladder to bigger properties, my mortgage outgoings are falling. But that’s the craziness of the mortgage market. It’s a depressing state of affairs for those whose parents can’t help. Really, I feel it, I’ve been there and know the despair and fear for the future.
The bright spots are that the Government’s Help to Buy scheme is solving this problem for some and the Lifetime ISA will give a welcome boost to savings. More lenders are now offering better rates at higher LTVs, as the health of the housing market now seems more assured than it did even four years ago. There are no easy solutions to any of this. But more individual lending decisions just might help fill in some of the gaps.