Help may be at hand for first-time buyers
Jonathan Moore is a director at Maxwell Moore
Today’s first-time buyers have it tough. Those aspiring to join the property ladder face hurdles which their parents’ generation never faced, such as: stagnant wages and rising property prices; high levels of student and personal debt; tighter lending rules which restrict borrowing capacity; low paid jobs in many sectors; zero-hours contracts.
A newly published survey by Post Office Money suggests that one in four young buyers would not be able to contemplate buying without a partner.
The same report also highlights that the average price for a FTB property has risen 7% in the last year.
This demonstrates a key issue for many FTBs: whilst they are saving hard for a deposit, their target is moving away from them, often at a faster rate than they can save.
Home-ownership levels have been falling for most of this century. Whilst for some renting is an active choice due to greater flexibility, the inability to purchase is a huge frustration for many.
It has ramifications for later life too: FTBs are often taking longer mortgage terms, starting them later in life, and thus having to work further into old age.
For those who can never buy, funding sufficient pension provision to also afford rent payments in retirement is a huge challenge.
Help may finally be at hand however, if a petition to parliament leads to a change to lending rules. Currently, the amount that can be borrowed for a mortgage is determined by an affordability assessment, which considers a variety of living costs which a borrower may face, and seeks to ensure the proposed mortgage is affordable after accounting for these costs.
These rules, introduced in 2014, were intended to reduce the likelihood that a borrower would find themselves repossessed or in payment difficulties due to being unable to afford the mortgage they had taken out.
Under the current rules, a track-record of paying rent is ignored. A would-be borrower cannot say ‘I have been paying X amount of rent and this therefore proves that I can pay a similar level of mortgage’.
There is of course a good reason for this: in a worst-case scenario, a tenancy can be ended relatively quickly and the tenant can seek a cheaper way of living. A borrower with a mortgage is unlikely to be able to move as swiftly (especially if the housing market is struggling), and is therefore far more likely to be trapped with an intolerable financial burden.
Over the last three years, the debate has raged on about how affordability for FTBs should be assessed.
Now, a petition to government has gained sufficient numbers for it to be debated in Parliament (144k+ signatories at the time of writing).
Parliament is being asked to debate whether the ability to pay a certain level of rent should be taken to mean that a mortgage of the same amount or less is, by implication, affordable irrespective of whether the current affordability rules are met or not.
Parliament and the regulator are clearly not the same thing, so a debate will not necessarily lead to change. However, the fact that it is to be debated is a positive move, and it could be the first step to a modification of the current rules.
Whilst the existing approach was intended to protect borrowers from unaffordable borrowing, there is a wider picture which has maybe been given insufficient prominence.
By protecting borrowers from one issue, they are exposed to a broader range of issues such as being disenfranchised from home ownership, making it more expensive if they do eventually buy, and committing them to a lifetime of renting if they cannot.
A refinement to the affordability process could be a game-changer, allowing greater numbers of FTBs to join the property ladder without needing to share the title, take out other loans, or rely on family.
Nobody wants to see a return to lax lending and consequent boom and bust, but if there is the opportunity to re-engage with this topic and find a solution that eases the plight of FTBs, then lenders and intermediaries should play their part in championing this debate.