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.
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.
