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

In 2018 the average first-time buyer’s mortgage payment was £633 per calendar month: the affordability test would have determined that they could make repayments at £1,075 per calendar month. The CPS estimates that 2.8m renting households could make the former, but only 1m the latter.

The interest-rate stress-test does not need to be applied to mortgages with initial terms of five years or more, but most banks choose to apply it anyway. 

International regulations out of Basel now require more capital to be held against high loan-to-value (LTV) mortgages.

First-time buyers

The median first-time buyer was made a 95 per cent mortgage between 1985 and 1997, then a 90 per cent mortgage until the financial crisis, whereafter the median LTV fell to 75 per cent as market conditions tightened, and had only made it back to 85 per cent by 2017 (prior to the Covid-19 tightening there were 95 per cent mortgages on the market, but they were scarce). 

As LTVs have fallen, saving for a deposit has become harder. During the 1990s the median first-time buyer paid a deposit equivalent to about 10 per cent of their income, then in the 2000s it was between 20 per cent and 40 per cent: after the financial crisis it jumped and was still as high as 60 per cent by 2017.

CPS analysis found that this post-crisis growth in the deposit burden has occurred principally as a result of lower LTVs rather than rising house prices: 10 per cent of the median first-time buyer’s house price has been equivalent to 40 per cent of their income over the years since, as it was on the eve of the crisis.

CPS analysis shows that 3.5m of the 4.8m English private renters have incomes higher than the bottom 10 per cent of actual first-time buyers, but savings amongst tenants fall far short of deposit requirements.

Even when deposits can be acquired, loan sizes, necessarily limited due to the interest-rate risk, except for those on the highest incomes, are too small to buy anything. The result is that mortgage lending is limited to high-wealth, high-income individuals: in the decade from 2005 there 2.2m fewer first-time mortgages made than in the previous two decades.

In today’s mortgage market, then, regulators and bankers are only able to improve financial stability at the expense of home ownership.

The settlement may be financially stable but it is politically unstable: younger generations will not be content to be the eternal tenants of a new gentry.

Fixed rate mortgages

The CPS proposes an alternative, one that should both satisfy the financial stability demands of the last crisis and allow for an expansion of homeownership: first-time buyers should be offered 25-year fixed-rate mortgages, so that there is no need to stress-test them at higher rates, since they will never pay them. These mortgages should be made at 95 per cent LTV.