Charles Haresnape is managing director of Aldermore Residential Mortgages
There’s nothing like a public dust-up to generate interest in a subject and that appears to be exactly what’s happening in the mortgage market at the moment.
The homeless charity Shelter recently pointed its finger at both the government and mortgage industry and said that “it's high time the housing minister stopped bowing to the banking lobby and ignoring the advice of economic experts and consumers who have sent clear signals that mortgage lenders need to clean their act up”.
The Council of Mortgage Lenders quickly hit back, saying: “Shelter seems unaware that mortgage lenders do, in fact, support reform. However, it is the detail of that reform that needs care if undesirable and unintended impacts are to be avoided.”
This little spat came as the result of research undertaken by YouGov on behalf of Shelter, which revealed that homeowners want lenders to be more responsible, even if that makes it harder for them to get mortgages. In particular, 84% of first-time buyers said lenders should only lend to borrowers who can prove they can afford a loan and 75% said that banks should ensure borrowers can afford to repay their mortgages once all other costs have been taken into consideration.
This all sounds very sensible but, without having seen the research itself, it sounds a little bit like one of those Yes Minister episodes in which Sir Humphrey carefully crafts research questions to elicit the responses he wants to hear, rather than providing answers which genuinely help clarify an issue. You know the sort of thing I mean: Are there too many over-weight people? Yes. Does fast food contain too many calories? Yes. Does fast food contribute to a national obesity problem? Yes. Are fast food companies therefore the reason there are too many over-weight people? Er....!
If you go out and ask consumers if they agree that lenders should check a borrower’s income before giving a loan, it’s no surprise the vast majority say yes. Of course they should. The problem is that the question implies that lenders don’t check, which isn’t true. Asking research questions which paint financial institutions in a bad light, is about as challenging as asking school children if they would like longer holidays. The answers are pretty predictable, but don’t necessarily help move the debate along.
Of far more interest and, in my view, of greater value, was the CML’s latest News and Views which was published at the same time as Shelter’s research, which gave a detailed and analytical insight into the plight of first-time buyers. It contains far too much information for me to try to summarise here, but one of the facts which really does jump out is that for many first-time buyers seeking a mortgage, the killer blow isn’t so much affordability as the size of the deposit required.
Deposits as a percentage of income have increased from 41% in Q1 2007 to 87% in Q1 2011 and deposits as a percentage of purchase price have also increased from 10% to 21% over the same period. This is partly a result of tighter lending criteria being imposed by lenders, but it also reflects the fact that average incomes have fallen from £34,200 to £32,507 over that four year period.
Deposits are, for me, the key issue that the lending industry needs to address if it really want to help first-time buyers. In today’s market, to say that lenders need to check affordability is a case of shutting the stable door after the horse has bolted. As brokers know only too well, affordability is being rigorously checked and loans are only being granted to those who can afford them.
However, loans are also being denied to borrowers who can afford the monthly repayments, but can’t afford the deposit.
For me, that’s the real issue. Financial institutions must think and act innovatively on behalf of first-time buyers in order to find practical solutions to the deposit issue, whilst remaining mindful of the need to continue being responsible lenders.
