News Review: Specialist Prime
A home-grown solution at the housing summit
by Charles Haresnape, managing director, residential mortgages, Aldermore
First we had the Big Society, then Project merlin and now the housing summit. all three are attempts by government to address key issues of the day. the Big Society is encouraging us all to play our part in helping to improve the society in which we live (presumably because spending cuts mean the government can no longer afford to fund essential projects themselves?). Project merlin is about gaining commitment from the big banks to stop paying big bonuses and start supporting small businesses. and the housing summit, was an attempt by housing minister grant Shapps to encourage senior bosses from the mortgage industry to solve the first-time buyer funding crisis. However, despite all the
talk, the conclusion of the summit, as michael coogan, director general of the council of mortgage Lenders so succinctly put it, was that there is no ‘magic bullet’. as much as the government would dearly love to be able to create instant solutions to its many problems, the truth is that long-term sustainable solutions are unlikely to emanate from the corridors of Whitehall. i suspect that solutions
to the woes of first-time buyers will come from within the housing and mortgage markets and not
from politicians. Politicians are, however, right to be concerned, because first-time buyers are facing a real crisis. the cmL recently reported that in december just 14,500 loans were advanced to first- time buyers - a figure which has slumped 42% by number and 41% by value from the previous december. First- time buyers forked-out, on average, a deposit of £31,500 - at the start of 2007, just before the credit crunch really started to bite, the average deposit was £12,700. it’s a big problem. no wonder the government
estimates there are currently 1.4 million households who want to own their own home but can’t do so. in 2010 the value of loans granted to first- time buyers was £23.3bn, compared to £77.1bn lent in total for house purchase. First-time buyers therefore account for less than a third of the house purchase market. However, they are an essential ingredient to the future health of the market (rightmove has recently said that the current level is approximately half of what it should be in order to ensure the market remains healthy), which is why the government is so keen to find a quick solution to the problem. But the problems run
deeper than a shortage of funding and high house prices. For example, one of the major hurdles first-time buyers have to overcome is lower loan to values. However, lower maximum LtVs haven’t come about simply because lenders have tightened their lending criteria in order to preserve credit quality, but
20 mortgage introducer MARCH 2011
because a 90% LtV loan requires lenders to hold typically between six and eight times as much capital as a 60% LtV loan. today’s risk-averse
regulatory
environment is taking its toll. First-time buyers are,
themselves, also part of the problem. changing lifestyles, aspirations and a desire for greater mobility has meant that, increasingly, young people are opting to rent rather than buy as a matter of preference. although the desire to own a home of our own remains deeply ingrained within our national psyche, the youth of today are becoming more inclined to remain free of the burden of a mortgage for a few years longer.
Innovation as i mentioned earlier, i believe the solution to the problems facing first-time buyers will come from within the housing and mortgage markets rather than government and there is evidence of that process happening, with deals being made available which allow parental assistance with deposits and for equity sharing. For example, northstar Homes has linked- up with Bath Building Society to offer a mortgage which lets parents help their offspring buy a home while they’re still at university. the co-op Bank offers a guarantor scheme which requires just a 15% deposit and Lloyds has launched its Lend a Hand deal which allows children to dip into the bank of mum and dad for their deposit, meaning
that first-time buyers only need to find a 5% deposit of their own. the house builder taylor Wimpey has recently launched a mortgage guarantee scheme in conjunction with the melton mowbray and Saffron Building Societies, which offers a two year fixed rate mortgage of between 5.49% and 5.99% with an LtV of 95%. i have no doubt we’ll see more schemes being launched onto the market during the course of the year, as lenders’ product development teams get to grips with the challenges facing first-time buyers. as always, it will be competition rather than intervention which will win the day. on a final note, it’s
interesting that the cmL reported there was no magic bullet that would ‘normalise’ the mortgage market. the obvious question is what should a normal mortgage market look like? i’m sure most in the industry would agree that the mortgage market just prior to the onset of the credit crunch was anything but normal, with double-digit house price inflation and unsustainable increases in new lending. ask a first-time buyer what
a ‘normal‘ housing market should look like and they’ll probably say house prices 20- 30% lower than they are today, house price inflation running no higher than the prevailing rPi rate of inflation and deposits of no more than 10%. ironically, by the time the economy does eventually pull out of recession, that may be the market in which they find themselves.
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