Although homeowners gain financially in contrast to tenants, mortgage regulations are preventing would-be buyers from stepping onto the property ladder.
New research conducted by the Intermediary Mortgage Lenders Association (IMLA) has found that the average owner could be better off to the tune of £352,500 over the next 30 years, compared to the average private renter.
The report, The Intergenerational Divide, which analysed the housing and mortgage markets, calculates that private renters could expect to pay on average £451,600 over the next 30 years, assuming a 2% increase in rent per year. However, an owner with a 25-year repayment mortgage would pay £317,900 if interest rates stay at current levels.
Over a 30-year period, therefore, the homeowner would pay £133,700 less than the private renter. If equity is added, the owner could be £352,500 better off by the end of the term. And that’s without factoring in any likely increases in house prices.
This scenario is based on an average two-year fixed rate mortgage taken out in June 2019 at 95% loan-to-value. The borrower switches to a 90% LTV loan once capital repayments have reduced the LTV to below 90%, and then to a 75% LTV mortgage when the LTV falls below 75% (still using June 2019 rates).
The calculation does not assume any increase in house prices, although maintenance, repairs and purchase costs have been included. One further advantage for the owner is that there would be no more mortgage payments after 30 years, whereas the renter would continue to pay rent for the rest of their life.
The report also shows that mortgage rates would have to be greater than 11.5% during the life of a loan before owning and renting produced expected financial returns which cancelled each other out. And this scenario is far in excess of the current stress-testing which lenders are obliged to carry out when assessing borrower affordability.
Kate Davies, executive director of IMLA, commented: “Reduced mortgage availability and the need for buyers to find increased deposits following the financial crisis resulted in a sudden fall in the number of first-time buyers. The addition of stricter affordability criteria to the mortgage rules has increased the problems faced by potential buyers.
“People who rent privately and can afford their monthly payments are finding it difficult to obtain a mortgage with the same or even lower monthly payments. In addition, the virtual disappearance of interest-only mortgages as a means of enabling affordability has cut the number of options for first-time buyers.”
Mortgage lending criteria
The research suggests that it was the sudden tightening of mortgage lending criteria following the financial crisis, rather than rising house prices, that prevented many would-be buyers from getting onto the property ladder.
Buyers also have to find larger deposits with the near-disappearance of higher loan-to-value loans, although the ongoing low interest rates mean that once a loan is in place, it is affordable.
IMLA would like the government to commission an independent cost-benefit analysis of the current regulatory regime for mortgages which takes account of the long-term costs to consumers of not being able to buy a home. Such an analysis would hopefully show whether the costs to consumers of not buying would justify changes to the current regulations.
Davies concluded that it is important that the FCA and the Bank of England recognise and consider the financial position of those who cannot buy or enter social housing when implementing regulations in the mortgage market.