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What Happened To The Housing Ladder?

It is with relief that we welcome the stability of a majority government, especially one that believes in the concept of home ownership.

The raft of proposals that has been promised to help first time buyers onto the housing ladder is to be applauded.  The Help to Buy 2 Scheme, The Help to Buy ISA, discounts on new homes of up to 20%, more Social Housing being released under the Right to Buy Scheme, the building of 200,000 new homes on Brownfield sites.

However, solving the problems of first time buyers is not the total solution to solving the problem of the property market. Helping First Time Buyers provides a popular ‘sound-bite’ but no-one seems to be looking at the bigger picture as to why there continues to be a lack of new property coming onto the market.

Could it be that many couples who have saved hard and sacrificed much to get onto that first rung are simply stuck there? Typically, young couples move up the housing ladder as their families grow and their careers progress.  But with wages growing by just 1 or 2% per year – if at all – and property prices growing currently at 8.4%* house prices rises easily outstrip any increase in earnings.  Add to this the cost of moving, with estate agents fees at 1-3%, stamp duty, legal fees and removals the cost of moving that one step up the ladder is prohibitively expensive.

Is it feasible for the average first time home owner to pay the bills, start a family and manage to save towards the cost of a larger home? Probably not!

Strict lending criteria means that most lenders use a multiple of income criteria at 3 x salary and since the Mortgage Market Review (MMR) in 2012 lenders now take into account the borrowers monthly expenses to ensure the borrowing is affordable.

Example: Assuming the average couple own a property worth £185,000 and they have 25% equity in the property,  this gives them £46,250 to put down on their next house at say £215,000, leaving them with a deficit of £168,750 + moving expenses of just over £8,000 (agents fees, stamp duty, legal expenses, survey and moving expenses) they would need a mortgage of £176,750. Using the lender’s calculation of dividing by 3 this means our average couple would need a joint income of approximately £58,900 to move just one step up the ladder.

The simple truth is that income does not grow in proportion to property prices. Property prices will not, in the long term, come down and income cannot rise to the levels that lenders currently require to comfortably repay the amount of mortgage needed.

The answer must be a concerted effort by Government and the Council for Mortgage Lenders (CLC) to make mortgage borrowing more affordable for everyone on the property ladder and not just first time buyers.

There are three potential solutions that Government and the CLC could consider:-

  1. The re-introduction of Mortgage Interest Relief at Source (MIRAS). This tax incentive provides borrowers with tax relief on the interest payments of their mortgage. As the interest is deducted at source it means that the monthly mortgage payment is reduced – meaning that the lender can lend more.
  2. Longer term mortgages. Traditionally the term of a mortgage has been 25 years however, with people living and working longer there is no reason why this could not be extended to a term of 40 – 50 years – this would halve the monthly repayments and mean that the lender could lend much more.
  1. Longer fixed rates. As the lender is duty bound to ensure that the mortgage is affordable they currently have to calculate the loan on the basis of future interest rate rises. With a long term fixed interest rate this ceases to be a problem. We are currently seeing longer fixed term interest rates – but why not for the entire length of the mortgage?

Sharon Buthlay

Property Lawyer

Director of Conveyancing Marketing Services Ltd

* House price index January 2015

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