Developers can only build at the rate they can sell, and this is intrinsically linked to mortgage financing. Long-term, fixed-rate mortgages above the 4.5 times income threshold can be part of the solution, says Arjan Verbeek
The United Kingdom’s housing market is at a critical juncture. The government has pledged to deliver 300,000 new homes a year.
A worthy ambition, but in order to succeed, we must ensure the underlying mortgage financing is available. Simply put, the mortgage industry must be able to play a role in helping meet this ambitious target through products and schemes that responsibly help people into homeownership.
Let us quickly run through the maths. In 2023, the average UK salary was £34,933. The average new build is priced at £299k. The average high-street bank can lend up to 4.5 times an individual’s salary and typically requires a five to 10 per cent deposit. Even in this scenario, the individual would still be short of the average house price by over £100k.
When played out on a larger scale, the numbers just don’t add up.
Unlocking £85bn
Developers can only build at the rate at which they can sell, and this is intrinsically linked to mortgage finance borrowers can access. Assuming new build developments are targeted at first time buyers who require higher loan to value and high loan to income (LTI) mortgage products, then £85bn will need to be unlocked in mortgage financing, and means lending above the 4.5 times threshold.
However, the challenge that exists is that market capacity for delivering the required financing is restricted. The Bank of England (BoE) considers build-up of lending at greater than 4.5 times LTI a potential systemic risk and ensures they are not widespread by placing a restrictive 15 per cent limit on their number. As a result however, market capacity is limited to around £23bn, which is well short of the £85bn required.
If the market can’t provide the financing, how can developers deliver record levels of housebuilding?
Now, here’s a solution – and it comes at no cost to the Treasury and reduces the risk the BoE is concerned with. Exempting long-term fixed-rate mortgages from the LTI cap.
Here comes the solution – and it comes at no cost to the Treasury and reduces the risk the BoE is concerned with
These products allow future homeowners to safely borrow more at a rate which can be fixed for 10 to 40 years, and with early repayment charges it provides the necessary flexibility. Given the rate is fixed, the risks that the BoE is concerned with is reduced.
The housing crisis is not just a matter of building more homes; it is also about ensuring that people have the mortgage products necessary to get onto the ladder. By amending the LTI cap and embracing long-term fixed-rate mortgages, the UK can take a decisive step towards a more inclusive and sustainable housing market.
Without change, the joy and security of homeownership will vanish. We are creating a nation of renters otherwise. The number of over 65s living in rented accommodation is expected to double by 2040. Surely, this is the bigger systemic risk that the Bank of England should concern itself with. The Prime Minister recently pledged to remove regulation that is hindering investment and growth. There is no better time to put this into action.
Arjan Verbeek is CEO and co-founder of Perenna