Before the turmoil that spread through Downing Street recently, Boris Johnson revealed that he was considering plans to introduce a 50-year mortgage plan. As more people try with no luck to get on a property ladder, options such as these longer-term mortgages become attractive methods for buyers to take that first step.
Considering last year, the average employee working full-time in England could expect to pay 9.1 times their earnings on purchasing a home, people are exploring different options to try and get on the property ladder.
Now, it seems the first 50-year mortgages could be seen in the market soon. This week, it was announced that a new UK-based specialist lender has entered the market and plans to offer mortgages with fixed rates of up to 50 years. Initially, Perenna will offer fixed term loans of up to 30 years, before introducing options that last for even longer.
Prospects of a 50-year mortgage can be a little daunting, but for many first-time buyers in the U.K. it is important the government explores options allowing them to purchase a home. The plan for these mortgages would be that they could be transferable to other properties, offering some flexibility. If this were the case, it will allow buyers to build up equity, rather than paying rent. Under this plan, buyers would be able to borrow considerably more, and spread the payments out over a longer period – even up to eight times their income, more than current offerings according to potential providers. Many commentators feel the plan to offer these longer-term mortgages, will appeal to first-time buyers who can’t pass affordability tests for existing products.
So, what are the drawbacks? Many consumers feel uncomfortable passing debt onto what will most likely be their children or other close relatives in the event it has not been paid off. However, the chances that the mortgage will be bequeathed with these higher value loans is greatly increased. There is also the risk that the longer-term fixed rate could be more expensive over the course of the borrowing period. So, whilst you may have lower monthly payments, you may end up paying more in the long run. There’s also the risk of higher break charges. Plus, the fact the government is endorsing initiatives such as this one, ignores the most prudent solution to the housing crisis which is a political push to accelerate the building of new houses. The most fundamental issue in the U.K. housing market is that of housing supply, and this mortgage solution does nothing to tackle this.
However, as homeownership levels continue to fall, the prize for a government that can bring levels up is substantial, and so more unconventional methods to get people on the property ladder, such as these mortgages, are rightly being considered.
What Will Fill the Void Left By The Help To Buy Scheme?
361,075 homes were bought using the scheme from April 2013 to March 2022.
The Help to Buy scheme is set to reach its conclusion in March 2023, with the scheme largely seen as having been highly successful in providing a helping hand to those looking to get on to the property ladder.
Buyers in England have two months left to apply for the scheme before submissions close on October 31.
Craig Hall, director of new homes financial services at LSL, explained the government is unlikely to make a U-turn on its decision to remove the scheme, despite the current turmoil within the Conservative party at the moment.
Assessing its success
Looking to the first-time buyer only Help to Buy scheme, which came into effect in April last year, Hall explained that regional price caps have made it particularly difficult for those looking to purchase properties in the midlands and north of England.
“Builders were reporting that equity loans were accounting for 40% of sales, however as the scheme is now restricted to first-time buyers, alongside regional price caps, this has dropped to below 20%,” Hall said.
What are the alternatives?
Many have been looking to what schemes may be able to fill the void, especially given rising house prices and the cost-of-living crisis currently being endured by the UK.
Hall noted that there are a variety of schemes, which, combined, may be able to help, such as Shared Ownership, the First Homes scheme, Deposit Unlock and Own New Market Mortgage.
“In a market struggling financially, given inflation and the cost-of-living crisis, high loan-to-value (LTV) products are the first to go and the last to come back, so therefore it is essential there are schemes available for first-time buyers,” said Hall.
He went on to say that having these schemes available lowers the risk for lenders and allows them to continue providing for customers who have smaller deposits.
“Shared Ownership has been around for 40 years and is a great option for buyers with small deposits to get on to the property ladder, but in order for it to achieve real success, we need to see an increase in supply,” Hall said.
He called on the government, housing associations and private registered providers to construct more properties designed for this scheme, as Hall noted that the current stock for both is not meeting demand – with at least 10 buyers for one Shared Ownership home.
Hall believes that the private sector can step in and assist with equity loan and share schemes, but explained that it will need support from first charge lenders to do so effectively.
“In the wake of the Help to Buy scheme there will be a range of solutions, but it all comes down to proper independent mortgage advice, brokers need to be aware of all the options available to buyers and be able to accurately suggest the best fits,” Hall added.
According to Hall, following the conclusion of Help to Buy, he believes the schemes listed above will start to see more traction from both a demand perspective as well as investment.