Mortgages  

Should first-time buyers be offered long-term fixed rates?

  • Describe some of the problems of first time buyers getting onto the property ladder
  • Identify who the housing market is geared towards
  • Explain why long-term fixed rate mortgages might be the answer
CPD
Approx.30min
Should first-time buyers be offered long-term fixed rates?
 Pexels/Ketut Subiyanto

Between 1991 and 2016, the proportion of 25-to-39-year-olds owning their home almost halved, from 67 per cent to 38 per cent; the collapse among 18-to-24-year-olds was even greater, from 36 per cent to just ten percent.

The foundation of the British economic settlement – homeownership – has by now been denied to several generations of Britons. Mrs Thatcher talked of creating a property-owning democracy: in fact, 20 of 27 European countries have a higher homeownership rate than the United Kingdom.

In part, we have failed to build enough homes: the more that are built, the lower their price will be. 

But what matters for ownership as much as how many are built is who is buying them: that point was made by ‘Resentful Renters’, a Centre for Policy Studies paper authored by Graham Edwards, and from which the government’s recently announced ‘Generation Buy’ mortgage market policy has been derived.

Home ownership

Between 2005 and 2015 the housing stock grew by 1.7m, but the number of owner-occupied homes fell by 0.4m, as the number of landlord-owned houses rose by 2.1m. If the owner-occupation rate across all age groups to 65 had been in 2016 what it was in 2005, there would be 3.57m more homeowners – these are the paper’s ‘resentful renters’. 

The rate of homeownership is lower in London and the south east where supply shortages are most acute and prices and price-to-income ratios are highest.

Curiously, though, the decline in the rate of ownership over the decade, and therefore the proportion of houses occupied by resentful renters, is geographically evenly spread. The English average is 5.6 per cent, and indeed the proportion in London is 5.8 per cent, but it is higher in Yorkshire and the Midlands at just over 6 per cent. 

The CPS paper argues that the prudential policies necessary in a mortgage market dominated by banks lending from short funding on variable rates in a low interest rate environment, as since the financial crisis, tilt purchasing power away from first-time buyers, and so towards buy-to-let landlords.

Finance for young, would-be homeowners has become scarce, whereas older households, who have accumulated wealth through historical housing inflation and generous occupational pensions, are leveraging their wealth using cheap buy-to-let finance and buying up the housing stock.

Since the failure of the US mortgage market, regulators and bankers have attempted to ensure that mortgagees can meet their repayments in the event of a spike in interest rates, and further attempted to limit the number of homeowners that would be underwater in the event of a given price fall. 

Bank of England regulations require mortgage applicants to pass an affordability test that determines whether they could make their repayments at three percentage points above their reversion rate.

So while the average interest rate actually charged to first-time buyers at the time of publication was 2.35 per cent, the average ‘stressed’ interest rate used in the test was 7.26 per cent.