2016 has certainly been an intriguing and, to some extent, disturbing year to get one’s head around. From a mortgage perspective, I’m struggling to think of a period in which there has been so much intervention in the market; intervention which has been designed for a purpose, namely to continue to aid first-time buyers on to the market, and yet has focused on diminishing another sector, namely buy-to-let, in order to achieve that goal.
Of course we’ve had additions and addendums to the Help to Buy ‘brand’ in order to support first-timer activity, but part of me would have to say that the fundamental issues for those wishing to get on the housing ladder still remain. They are, of course, the ability to save for the necessary deposit, the availability of homes to purchase, and the appetite of lenders to offer the necessary loans that first-timers require most, i.e., high LTV mortgages.
I read some interesting research recently from My Home Move which appeared to show that, when it comes to one of those fundamental problems – saving for a deposit – the issues that have existed for so long still remain. The top line of the research said that homebuyer deposits now cost £5,000 more than they did a year ago, and that homes on average are being purchased with a deposit of £55,000, compared to £50,000 in the same six-month period of 2015.
Varying degrees of house price increases across the country have of course impacted on the deposits required, and the amounts being put down to purchase. For example, in London deposits were up by £18,000, in the North East they had actually decreased by 1.78%. Now, these figures don’t just relate to first-time buyer purchases but they give a clear idea of the market that these types of buyers have to operate in. The fact is that deposit levels are high even if you’re able to secure a 95% LTV mortgage, or more likely a 90% LTV product.
It’s perhaps no wonder that the government have introduced the Help to Buy ISA because it’s clear that saving for a deposit is incredibly difficult, especially if you have no parental help, you are paying significant amounts of rent each week, you have student loans and other debts to service, and the list of financial responsibilities goes on. Let’s be frank, the reason why we have seen a growth in the use of the ‘Bank of Mum and Dad’ is that, for many people, the chances of purchasing a home without the largesse of parents or grandparents is slim in the extreme.
It is within this environment that we see ever more suggestions about the way(s) in which potential homebuyers can get to the deposit levels required. Again, just recently I read about a proposal which would allow those with a pension to access some of its value early if they were going to use it to buy a first home. The proposal was pitched at a maximum of 50% of the pension’s current value up to £15,000, and as you might imagine, it generated a significant amount of debate particularly amongst the financial advice community who might see this as something close to blasphemy.
Now, while I understand the reasons why you wouldn’t want to encourage people to do this, especially when you consider the growing retirement income crisis that we have, and the significant focus being placed on individuals to save within their pension for their retirement years, I’m also conscious that people should be allowed to make their own decisions. After all, what are the pension freedoms all about? Choice and personal responsibility, and again we might not like the choices people are making but that doesn’t mean they shouldn’t have the right to make them.
If you’re a 30-year old who has saved into a pension since you started work, have built up something of a pot and yet see no way of being able to purchase your own home, then you may well view this proposal as an opportunity to make that first move. It may seem irresponsible to some, but what would your priorities be at that age? Would you be thinking about your retirement or would you be thinking about housing your new family for instance? I know that many people would be quite content to access a pension to meet a priority today, rather than worry about having a shortfall in a pension pot 35/40 years down the line. Again, it may not be the decision that we would want to encourage but in this life you always have to prioritise.
In that sense I’m not averse to people using their money as they see fit, although I quite agree that having the opportunity to pull the entire pension pot out whenever you feel like, is not going to be a good choice. There are also two sides to the coin here – it’s not just the deposit requirement, but in a market where house price inflation continues to grow (albeit at lower levels) how can we get to a point where a 5% deposit is still viable, and there are mortgages available for those who only have this amount of money?
The closure of Help to Buy 2 at the end of this year again draws into sharp light the need for such mortgage products, the need for lenders to remain active in the high LTV sector, and the need for risk mitigants to be used in order to keep offering such loans to first-timers (and others) but also, at the same time, ensure there is a level of prudency to their offering. We know that deposit requirements are not going to fall back significantly anytime soon, so there needs to be a marriage here between supporting people’s efforts to save their deposits, and providing confidence that when they reach their goals there will be lenders and products available for them.
Without both, we will see first-time buyer activity fall further and the goals the government has set for themselves are very unlikely to be reached.
Pad Bamford is business development director at AmTrust Mortgage Insurance