One in five tenants are putting plans to buy a property on hold amid the current housing crisis, new figures have revealed.
A total of 19% of tenants surveyed by specialist mortgage provider The Mortgage Lender said that high mortgage rates means they can't afford to buy a property. It follows average two-year fixed rates reaching 6.66% this month, according to Moneyfacts. It is the equivalent of a mortgage payment of around £1,000 a month on a £150,000 home loan.
The TML survey also suggested that 12 per cent of tenants would stay renting until house prices fell.
House price growth has already begun to slow, dropping from 3.2% in the year to April to 1.9% in the year to May according to the latest official figures. The UK's average house price is £286,000, £6,000 higher than 12 months ago - but still £7,000 below the recent peak in September 2022, according to the Office for National Statistics.
A further slowdown is expected as the full extent of recent mortgage rate rises feeds through.
For some tenants, keeping an eye on the numbers is key to figuring out their next step. A total of 10% said they are waiting for mortgage rates to fall. At the same time, nine per cent agreed that there is no point in looking to buy until rates come down, and 6% are waiting to see the Bank of England's next decision on interest rates on 3 August before making a decision.
Despite this, 6% said they were still progressing with their home buying plans - although they are having to make significant compromises to do so. A quarter of those still planning to buy say that they're now buying away from traditional commuter towns, and 32% have had to move further from the city centre.
Similarly, 16% are buying in an area with cheaper living costs to offset the more expensive mortgage. Others are having to reconsider the properties themselves. One in five - at 21% - say that they're buying a cheaper property that needs more renovation work, and 12% are looking to buy smaller properties instead.
TML surveyed 2,005 adults, of which 905 were tenants - and these results are only focused on this slice of tenants. Steve Griffiths, of TML, said "the journey to buying a property can be a long one, and it can easily be complicated by the ebbs and flows of the housing market, particularly when we consider the current landscape. Although being adaptable and regularly checking in on the base rate will serve renters well in the long term, it's understandable that so many are feeling frustrated by their options. If it's not the right time to buy now but you plan to in the future, make sure you are still working towards becoming 'mortgage ready'. This will ensure when the time is right you are prepared to take that next step."
One in four new UK homebuyers under 25 rely on ‘bank of mum and dad’
First time buyers who rely on the Bank of Mum and Dad get a 10-year head start in the property market, according to new research from the Bank of England.
A blogpost by a Bank of England economist found that even before the sharp increase in house prices during the Covid-19 pandemic, the children of better-off parents were able to become owner occupiers four years earlier than those without parental support.
The study, which looked at mortgages issued between 2015 and 2017, said that of every 100 homeowners under the age of 30, 16 would have received help from the bank of mum and dad (Bomad), rising to one in four for those under 25.
Home buyers who can tap financial help from their parents are able to buy bigger houses sooner than those who rely on savings and bank lending alone. Those without support would have to wait an extra decade to buy a comparable property, the Bank of England found. “Deposits are two and a half times larger, loans are 30% smaller, and houses cost £15,000 more for those getting help, compared with those who are not,” according to the research, conducted by May Rostom, a senior analyst at the Bank.
The importance of financial support from parents has grown in recent years as members of the baby boomer generation have recycled some of the gains. Adjusted for inflation, the average house price has increased from about £100,000 to £275,000 since the mid-1970s, making it harder for those without rich parents to raise deposits and meet monthly mortgage payments.
While solo buyers would have to wait 10 years to buy an equivalent property, most instead choose to buy a cheaper house rather than wait years longer to save a bigger deposit. As a result, the average gap between those who get on the ladder with parental help and those who do it out of earnings alone is only four years.
The study found those with parental help bought more expensive homes. The average 26-year-old with help paid about £254,000 for their first home. Those with no help waited a decade – until they were 37 – to buy a property for an equivalent sum.
A leg up from parents has a knock on effect for wider living standards, the Bank of England said. Those who get a helping hand onto the housing ladder “are typically less-leveraged and have lower mortgage payments, leaving more leeway for them to save or spend their incomes on other things”. That is likely to be particularly important as interest rates rise. One in every 10 first time buyers under the age of 45 receives assistance in making their purchase, the research found. For under-25s, the share rises to more than one-quarter.
Those receiving support typically have a deposit of more than £100,000. Those without can put less than £50,000 towards their home. Ms Rostom said “whether and when you receive a gift can affect your entire homeownership trajectory – exacerbating the differences not just across generations, but within them.”
The report comes at a time of intense focus on the housing market. Years of limited supply under a tightly controlled planning system have been blamed for forcing house prices up to levels that make it hard for those without family wealth to buy a property in large parts of the country. House prices hit a record high of more than £292,500 on average last year before edging down to £285,861 in May, according to the Office for National Statistics.
Rishi Sunak, the Prime Minister, last week said the Government “will meet our manifesto commitment to build 1 million homes over this Parliament”, promising “to build the right homes where there is the most need and where there is local support, in the heart of Britain’s great cities”.
Dutch-style mortgages could solve first-time buyer crisis
Ministers are considering the benefits of Dutch-style, long-term fixed mortgages for first-time buyers who are struggling to afford shorter-term fixes which are stressed at higher rates.
Long-term fixed-rate mortgages are popular in countries such as the Netherlands and Denmark and offer borrowers the chance to pay at one interest rate for the entire term of the loan. They are easier for first-time buyers to secure and insulate borrowers against future interest rate shocks.
Andrew Griffith, economic secretary to the Treasury, last week met with other MPs, the Bank of England and lenders offering 40-year fixed mortgages. They discussed a number of “light touch regulatory changes” which would be needed to encourage more lenders to offer the product, including relaxing the loan-to-income limit and reducing capital requirements for long-term fixed mortgages.
Mr Griffith told The Telegraph he is “definitely interested” in the product as part of the solution to help more first-time buyers onto the property ladder. He said “if a mortgage really is fixed [for the entire term] then the stress tests of affordability aren’t as relevant as there is no chance of payments rising.”
The City minister did caveat that discussions were only just beginning. The Telegraph also understands that high street lenders are warning the Government against it, arguing that take-up will be small because no-one will want to fix for the duration of their mortgage term while interest rates are peaking.
In the short term, a Treasury spokesman said the Government is focusing its efforts on halving inflation to ease the pain for borrowers already laden with expensive mortgages. Experts have, however, singled out the UK as a geographic outlier due to its heavier-than-average reliance on short-term fixes.
Christian Hilber, a university professor at the London School of Economics, has said British mortgage borrowers “are much more exposed” to interest rate risk as compared with those in the Netherlands, Denmark and the US where longer-term fixes are far more popular. Before interest rates started shooting up above 1pc at the end of 2021, encouraging long-term fixed mortgages was a Tory manifesto commitment.
At the Conservative’s October 2020 party conference, former prime minister Boris Johnson said he wanted the UK mortgage market to branch out from popular two and five-year fixed rates and offer more 20 and 30-year fixed deals. At the time, he said “we believe that this policy could create 2 million more owner-occupiers, the biggest expansion of home ownership since the 1980s.”
Today, less than 1pc of mortgage holders are on fixed rates longer than five years – and the majority of these are older borrowers and not first-time buyers. This, industry experts have said, is because longer-term products currently available in the UK aren’t easily portable or penalty-free – making them less flexible for younger homeowners who may want to move before the term is up.
In June 2022, after rates had started rising, Mr Johnson brought up the “ultra-long” mortgages debate again at the Nato summit in Madrid. He said they presented one of the “creative ways” the Government could help more first-time buyers afford a home. Following last week’s roundtable, one of its attendees Anthony Browne – MP for South Cambridgeshire and a member of the Treasury Select Committee – wrote on the Conservative Home website “the Government is sympathetic to the case for opening up the market in long-term fixed rate mortgages. With relatively minor changes, homebuyers can be given a more balanced choice between short-term and fixed term mortgages. Stretched homeowners, first time buyers and pension funds could all benefit. Governments in the past have considered it, but the severe impact of rising interest rates on homeowners means that politically there is no better time to make the change than now.”
Homebuyers looking to take out a mortgage in the current market have to be able to afford a lender’s standard variable rate – which is 7.67% on average, according to data firm Moneyfacts – plus 1 percentage point. Many first-time buyers simply cannot afford future interest repayments nearing 9pc, so are being denied mortgages.
Agents warned earlier this month that demand for homes is plunging as the mortgage crisis forces buyers out of the market.
Taking out a fixed rate for the entirety of the mortgage term – be that 25 or 30 years – means they won’t have to re-fix every two or five years, removing the need to afford a future interest rate. In his blog post, Mr Browne said there was a handful of regulatory changes discussed in the meeting which could push more lenders to offer these products.
One was to relax the loan-to-income limit for mortgages with fixed rates longer than 10 years, and to abolish it totally for mortgages that have fixed rates for the duration of the mortgage. He said “the current limit of lending a maximum of 4.5 times the borrower’s income is aimed at ensuring that borrowers won’t default if rates rise. Likewise, the Financial Conduct Authority could require less stringent affordability tests on borrowers if they are taking out long-term fixed mortgages, because they are less exposed to rate rises.”
Another suggestion was to reduce capital requirements for long-term fixed mortgages so it is cheaper for pensions and insurers are more likely to fund them.