This is an interesting time to be active in the mortgage space, particularly when it comes to first-time buyers and how they traverse the sector in order to own their first property.
For the best part of two decades now, we’ve seen an increasing number of first-time buyers relying on their parents, or other family members, in order to help them bridge the gap between wanting to buy a home and having the financial capability to do so.
The so-called ‘Bank of Mum & Dad’ is now a top 10 ‘lender’ in the UK. According to L&G it provides approximately £6 billion a year to its children; in 2020 the average amount given was £20k.
Why has this been necessary and why, according to Savills, will it ‘lend’ up to £25 billion over the period 2022-2024? The answer can be found in many aspects of our marketplace and life in general – house prices continuing to rise, a lack of supply particularly of affordable housing, the cost of renting going up, poor saving returns, wages not keeping pace with house prices, more competition for the houses that are available, and a post-pandemic world which has seen many of the issues mentioned exarcebated.
One must also surmise a fairly large degree of self-interest at play here for those in a position to help family members. Have these been acts merely borne out of love and support, or has there also been a significant element of self-preservation at play?
Without doubt, most parents and grandparents are gifting deposit levels or acting as guarantors or both, because they want to help their offspring get onto the ladder, however there will probably be a small part of them that recognises such actions are also likely to maintain the value of their own property or properties, bearing in mind that far more people now rely on this to supplement retirement income.
Property, as we know, is no longer just somewhere to live but increasingly seen as an asset to be utilised – you would not want to see your stocks and shares decrease over time, if you were relying on them later in life, so why should you want to see the value of your property? However, with the former there is little you can do to shore up the value of equities, with property – especially in a market like the UK where it is in short supply – you can do more.
One other factor in the growth of the Bank of Mum & Dad has been the access borrowers have had to high LTV mortgages. This has peaked and troughed consistently particularly since the Credit Crunch, plus we all know that in general high LTV mortgages tend to be priced significantly higher than their lower LTV counterparts.
As we have worked out many times, over the term of a mortgage, borrowers could save themselves thousands upon thousands of pounds in interest, if they are able to put down even a 10% deposit, compared to 5%, and the savings are of course far greater if they can push to 20/%25%.
It’s why first-timers have sought the help of parents/grandparents to boost their deposit levels and why we have seen such big sums ‘changing hands’. Plus, of course, as house prices have risen, existing owners have been able to tap into the increased equity to support their children.
But, where are we now and where might be heading? Well, there’s no doubt in my mind that the ‘Bank of Mum & Dad’ will continue to play and pay a major role in the UK first-time buyer market, but there’s also no doubt that the cost of living increases, interest rate rises, and everything else that is being added onto people’s monthly outgoings, is going to have an impact on the level of support that can and will be provided.
Canada Life recently produced some research which found that 48% of people who supported family members now will struggle to do so financially over the next 12 months. A period which is pretty much nailed on to be a recession, with everything that will bring.
Now, you might argue, that these are people unlikely to be supporting offspring to purchase anyway, but you would be surprised how many people have been willing to help in recent years, and there will be a group – perhaps significant – that are no longer in that position.
If that’s the case, then potential first-time buyers may well be looking for other alternatives. And not just to the Bank of Mum & Dad, but also the Government Guarantee Scheme and Help to Buy – both will be finished by Spring next year. It makes industry schemes like Deposit Unlock vitally important and makes a more general commitment to keep offering 5% deposit mortgages so vital.
And, while we are nowhere near the incredibly low level of products available prior to the Government guarantee scheme being launched last March, 95% LTV products have been dropping in recent months. We don’t want, or need, that trickle to become a flood.
Especially at a time when wannabe first-timers are also going to be impacted by higher rates, higher bills, higher cost of living, impacting on their ability to meet lenders’ affordability measures; so if we want to maintain activity in the FTB space, then we will need to maintain high LTV product choice.
The Bank of Mum & Dad is not going away, and those fortunate to have access to it will continue to benefit, but we must also consider those who do not have a friendly ‘bank manager’ to call upon. And to keep absolutely vital new blood coming into the housing market, we need a healthy and vibrant high LTV sector that continues to provide much-needed finance to those not boosted by family finances. Lets all work with lenders to show the benefits of keeping this mortgage avenue open.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International