SOMEHOW a home became an investment. Then, it became an economy. I’m not sure how that occurred. They are a depreciating asset from day one.
Take Switzerland, with arguably the richest population in the world. They don’t really buy houses, choosing instead to invest their capital elsewhere. Home ownership is around 45 per cent. It is 65 per cent in the UK and has been higher.
My house is just my home. If it rises in price, I pay more stamp duty for any moves, higher legal fees and higher mortgage rates and council tax. In the end, my children can enjoy a potential 40 per cent inheritance tax on its value. I therefore don’t get overly excited about the concept as an ‘economy’. It’s easy to see it as contrived. It creates a debt driven economy where moves in interest rates pull families’ finances and security apart.
If it is an economy, getting onto that first rung is important. It is, however, well beyond the first-time buyer, and in particular the renter. High rent, and no ability to put together a deposit, legal fees, carpets, cookers, furniture and then be ready to cash flow your bills, is quite formidable.
If the average house price is £290,000, the renter has to conjure up nearly £15,000 in deposits, and that’s from their net disposable income. It’s a ‘rabbit out of the hat’ moment, especially when you think of the student chained with their student debt.
The UK isn’t the most expensive place to buy, but it’s up there. If I calculate the price per square metre versus your disposable income, there are some interesting numbers. Turkey’s cost of a m2 is just four per cent of disposable income, and the USA is just 6.3 per cent. Italy is 10.7 per cent and the UK is 17 per cent. That is a hefty load on a family’s ability to put shelter, warmth and security over their family. Spare a thought for South Korea at 59.4 per cent. Golf is really expensive there too!
This is the first rung of a ladder (the housing market and a large driver of the UK economy) and it’s a foolish person who steps on to a ladder without the stability of a first rung.
The UK government is only too aware that its help to buy wasn’t much help, and that something needs to be done to assist those looking to provide security of home ownership. The recent move to revive the beleaguered help to buy scheme has been seen as a political vote swinger, and this may be the time to come up with something a little more creative or adventurous to assist the wobbly first rung.
Its previous plan to boost ownership via ramping up housebuilding just boosted house builders’ profits using taxpayer’s money.
The ladder’s real issue is that prices themselves are not necessarily the biggest hurdle. Think it through. All ‘first rungers’ will need a deposit or mortgage. The ability to borrow is therefore the real issue.
After the financial crisis, banks have a risk aversion and much tighter rules at the lower deposit end where they also charge higher rates -after all, it is a higher risk for them. If the government is to win votes, it might be around supporting banks with insurance guarantees at the lower deposit level, ie rung one. Otherwise, the help to buy scheme just supports lobbyists’ profits and most younger families wouldn’t be overly impressed with that.
In the meantime, those trapped in the private rented sector with rents in excess of mortgages may just have a potential greasing of their financial wheels.
Some lenders offer higher loan to value mortgages and the Skipton has just brought back in the 100 per cent mortgage. You must have proof of rent paid for 12 months in a row within the last 18 months, along with the household bills and you can’t have any credit issues.
Your monthly mortgage payment must be less than or equal to your previous six months average rent.
The first-time buyer living at home with the family doesn’t qualify, as they don’t have that rental record (and might use their low, to no rent to save a deposit - author winks at his daughters).
There are always various solutions to make it work, and your mortgage broker will undoubtedly be able to navigate those for you.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a mortgage enquiry email my mortgage director Pat Greene on firstname.lastname@example.org or call 028 6863 2692.