For too long now, renters have been hamstrung by rising rental payments, making saving for a deposit extremely difficult. Recent levels of higher inflation have arguably made this a lot harder.
Additionally, we will shortly see a reduction in the Stamp Duty threshold for first time buyers (‘FTBs’) too. In my opinion, this whole area needs proper focus and attention, and is a real social problem that must be tackled.
Recently, we have heard of the intention from the FCA and the Chancellor to consider cutting back on various lending restrictions. Areas of focus ought to be:
- Loan to Income ratios for lenders
- Affordability stress testing rules
- Capital rules that make it difficult and expensive for lenders to lend freely to those with so-called smaller deposits
For over a decade now, I have felt very strongly that lenders should be able to make more positive underwriting decisions based upon a tenant’s reliability or otherwise to maintain their rental payments. I applaud the small number of lenders that have made moves in this regard, but I would want to see much more common sense and freedom in this area.
I must also applaud those lenders who have tackled this problem head on, who are actively trying to help aspiring FTBs with a range of innovative products and solutions that make homeownership more accessible.
It would be good to see regulators reviewing certain rules - especially against a backdrop of falling interest rates. In certain market conditions, it makes sense to relax rules and, of course, tighten them again should conditions change.
I acknowledge the great outcome of tighter regulation following the global financial crisis, all of which have helped alongside changes to forbearance to avoid boom or bust. However, the cost of these changes has stopped almost three million aspiring FTBs from getting onto the housing ladder, leaving them reluctantly renting for far longer than they should be. Socially and economically, we’ve experienced a lost decade as a direct result.
The ability for renters to borrow a higher amount than the normal 4.5x income would be hugely beneficial, especially for those renting and residing in cities with high living costs, such as London. However, lenders are currently only permitted to issue these higher loan-to-income mortgages to 15% of applicants per quarter. Increasing this limit to 25% would mean lenders can lend more freely, but not too freely. Doing so could help to break the rental cycle, give the would-be buyer more purchasing power, and bridge that all-important affordability gap.
Likewise, stress testing levels make little sense in their current format. Would-be buyers on application for a mortgage will be ‘stress-tested’ at a standard variable rate (SVR) +1%. This means that someone taking out a mortgage from a lender with an SVR of 7.5% would be stress-tested at 8.5%. For example, someone buying a property worth £400,000 with a 10% deposit would be tested on the ability to pay as much as £3,000 a month - way above even the highest pay rate. Prudence makes sense, but this is too prudent.
The reality is that nobody typically ever sits on SVR. Instead, they simply switch to a new deal. Relaxing the rule further to a pay rate of + 2% or similar is a much more sensible and realistic scenario. I say this because half of aspiring buyers could afford mortgage payments – but not when stressed at these levels.
In addition, more lenders should accept rental payments as proof of affordability. If a renter has paid £1,500 rent for 36 months and not missed a payment, why then stress test at SVR +1%, which keeps them trapped in the rental cycle?
From a lender’s point of view, lending to borrowers with low deposits can be expensive. Current rules mean they must hold a higher amount of capital. For borrowers, this usually comes with a premium interest rate due to the associated risk of lending - made worse by a severe lack of lending supply at these levels.
Reviewing these rules would enable lenders to support those with smaller deposits, much as they did 30 years ago. Of course, this still needs to be responsibly underwritten, but a 5% deposit today is usually £15,000+ (compared to £5,000 30 years ago). At the risk of sounding frankly old, most 100% mortgages were underwritten and performed extremely well back then, so we need a proper discussion about this too.
Maybe 100% isn’t a position that all lenders would want to adopt, and I understand that. Ignoring any system constraints, why not lend between 95-100% more freely, but mandate overpayments to 95% - or even right down to 90% LTV? This would incentivise and reward the borrower with a slightly lower rate. This isn’t a new request on my part, and something I have seen done well by the private banks over the years, so why not make this approach more mainstream? Alternatively, lenders could make more use of ‘part and part’ (repayment/interest only) mortgages to help more FTBs get on the property ladder.
Undoubtedly, changing regulations takes time, and I recognise that enhancing lending platforms and pushing the risk boundaries outwards is no easy feat. Nevertheless, doing so could prove to be a lifeline for those who feel trapped in rented accommodation across the country, and in cities like London. With the Government looking for ways to grow the market, it’s about time that the housing and mortgage sectors got the chance to show what they can do when they’re in the driving seat.
There’s a great graph I’ve used recently that clearly shows healthy GDP for the UK. This directly mirrors the health of our housing market, thereby contributing to economic growth. Sound topical? It’s time for positive change, with zero need to spend the taxpayer’s money also.
