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The gulf between generation rent and those fortunate enough to have made their first step onto the housing ladder is growing.
For most young people, the biggest barriers to home ownership are the difficulty of raising a sufficient deposit and of passing lenders’ tough affordability tests. Soaring rents are only making matters worse, giving aspiring buyers little left at the end of the month to put towards a down payment on their first home.
Meanwhile, soaring house prices mean the amount renters need to save for that deposit is growing year on year and the size of mortgage they would need to buy a home is expanding to beyond what any lender would offer based on their salary.
For these frustrated renters, there is a bitter irony in the fact that if they could only get on the housing ladder they would find themselves better off. They would actually spend a lower portion of their income each month on keeping a roof over their heads.
The English Housing Survey recently found that home owners spend just 18% of their income on housing costs, while private renters pay nearly double that at 35%. Even people in the social housing are spending more of their income on rent than home owners at 28%.
While lenders do look at how a mortgage applicant manages their monthly outgoings, many feel that they do not place enough weight on the fact that the applicant is already managing the high cost of rental payments when deciding if they could afford what is almost certainly the lower cost of a home loan.
One priced-out renter, called Jamie Jack Pogson, was so fed up with his predicament he decided to make a petition to Parliament.
He called for lenders to be forced to consider rental payment history as sufficient proof that a mortgage applicant could afford a loan.
He said: “Since living on my own I have paid £70,000+ in rent on time yet still struggle to get a mortgage. Unless you are getting handouts, wealthy or in receipt of inheritance it’s almost impossible. I want paying rent on time to be recognised as evidence that mortgage re-payments can be met.”
Many other tenants clearly shared his view as the petition received more than 145,000 signatures, with the result that the Government had to consider whether the issue warranted a debate in Parliament.
Unfortunately for Jack and other like-minded renters, the Government’s view was that it didn’t merit further discussion.
In its response the Treasury pointed out that new mortgage regulations came into play in 2014 to address the poor quality lending of the boom years before the credit crunch. These rules which were brought in as part of the Mortgage Market Review, were designed to prevent borrowers falling into payment difficulty and, ultimately, losing their homes.
The Treasury said that lenders’ affordability assessments now look in detail at income and spending, including money spent on rent.
But it said: “A record of meeting rental payments is not sufficient in itself to demonstrate the affordability of a mortgage over the lifetime of the loan. This is because the affordability assessment must take account of a much wider range of factors.”
These factors include utility bills, council tax, insurance costs, credit card payments as well as leisure spending such as holidays, meals out and shopping for clothes.
While Jack Pogson, the instigator of the petition, raises a good point, it’s not really surprising that he didn’t get very far. Of course the Government can’t tell lenders who they should lend to and the mortgage regulation of recent years has generally had a positive impact in making the market a safer place for home buyers.
Yet there are undoubtedly people who are still being denied the opportunity to own their own homes because they struggle to prove they can afford mortgage costs.
Simon Checkley, managing director of Private Finance, says: “We all want to see responsible lending, but regulation has extinguished the creativity and flexibility that is needed in order to come up with products that really support first-time buyers. The lack of innovative products for first-time buyers has a knock-on effect on the whole housing market, stifling activity further up the chain.
“There is something deeply illogical about the fact would-be homebuyers are trapped in a vicious cycle of ever increasing rents and house prices making it impossible for them to get onto the property ladder. They are effectively paying their landlord’s mortgage, as the dream of home ownership moves further and further out of their grasp.
We would like to see regulators allow and lenders give applicants more credit for their ability to cope with the financial strain of high rental payments when assessing their mortgage worthiness. After all, if they could only get on the property ladder the financial strain they are under would probably ease over time.
“That said it’s also important the first-time buyers are not put off by the misguided perception that mortgages are unaffordable.”
For example, a competitive 95% mortgage of £200,000 available now at 3.69% fixed for two years over a 40-year term would have monthly capital and interest payment of £797.74.