A record number of first time buyers and home movers took out mortgages for over 25 years in 2015, as soaring house prices make it harder to get onto, or move up, the property ladder.
Affordability issues have also increased the amount of borrowers taking on mortgages worth more than 4.5 times their income, causing the Chief Economist at the Council of Mortgage Lenders (CML), Bob Pannell, to warn that a “potential problem is building under the noses” of the Bank of England’s Financial Policy Committee (FPC).
Statistics from the CML found that in the second half of last year, 58% of first time buyers took out mortgages for longer than the typical 25-year term. At the peak of the last housing boom in 2007, this was just 42%.
Homebuyers Stretching Their Mortgages to Get on Property Ladder
Meanwhile, 36% of home movers took out mortgages over the traditional 25 years – double the proportion before the housing crash.
Higher retirement ages and pension freedoms may have encouraged these buyers to borrow for longer, but the CML believes it is mainly a result of the need to stretch incomes to get onto the property ladder.
The CML’s data also shows a sharp rise in the proportion of borrowers taking out mortgages worth over 4.5 times their income.
Around two years ago, this type of lending was cracked down on, due to fears of a housing bubble. Banks and building societies are now only permitted to approve 15% of lending at that level.
After the clampdown from the FPC, the proportion of borrowers taking on such large loans fell, but in the fourth quarter (Q4) of 2015, the number of first time buyers and movers borrowing high amounts almost returned to 2014 levels. Over the quarter, 11% of first time buyers and 9.8% of movers borrowed more than 4.5 times their earnings to purchase a home.
Pannell explains how the mortgage market has changed: “After peaking at 10% just ahead of the FPC action in mid-2014, the proportion of high income multiple lending eased back considerably over the following year, to just below 7%.
“But the picture has changed a lot over the past six months or so. [It] has increased sharply, especially for movers, and retraced a good chunk of the previous year’s reduction.”
Pannell notes that there may have been “a precautionary ‘knee-jerk’ response from lenders” to the new rules when they were first announced, which is now unravelling as they get used to working within the guidelines.
However, he says that lending at all levels above 3.5 times earnings has risen and there are signs “that borrowers are now stretching their incomes more than in mid-2014”.
He adds that the 15% cap on 4.5 times lending means “we should expect to see a build-up of lending just below the 4.5 times threshold”.
At present, the FPC is monitoring the buy-to-let mortgage market, following a boom in borrowing by landlords.
However, Pannell believes: “A potential problem is building under the noses of FPC policymakers, and it has nothing to do with buy-to-let lending.”1
As buy-to-let investors seek to rush through rental property purchases ahead of the 1st April Stamp Duty deadline, it appears that the mortgage market across all sectors will see vast change in the coming months.
The latest information for landlords on property and finance can be found at LandlordNews.co.uk.
1 https://www.cml.org.uk/news/news-and-views/affordability-bites/
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