Government looks for creative ways to spur homebuying. This isn't it
The following is an opinion piece written by Matthew Sellers. The views expressed within the article are not necessarily those of Mortgage Introducer.
The housing crisis is well documented, and, keen for a PR win after a week in which a Tory whip has made headlines for drunkenly groping other men at a club, the Conservative government is looking at creative ways in which they can announce that they have a solution to the problem.
The latest headlines surround a fifty-year mortgage, a type of product that is widely used in Japan, that would allow homeowners to pass on the family home, and the debt that comes with it.
Of course, my initial thought was that this was a splendid idea! I get to spend the kid’s inheritance, and by saddling them with debt I am also providing them with a character-building experience, rather than allowing them to loaf around in my semi after I am despatched to a nursing home.
My second thought, however, was what about There’s Something About Mary?
In the film, there’s a great scene where the main character (Ben Stiller) picks up a hitchhiker who has a fabulous new business idea.
Hitchhiker: “You’ve heard of this thing, the 8-minute Abs?”
Stiller: “Yeah, that exercise video”
Hitchhiker: “Well this is going to blow them right out of the water. Listen to this”
Hitchhiker: “Seven. Minute. Abs”
And that, unfortunately, is a little like what this smells like.
We already have a 30-year mortgage – in fact, more than a third of first-time homebuyers already take out mortgages that could last 30 years or more. And the reduction in monthly payments won’t be anything to write home about.
Assume a new buyer forks out the median £278,000 for their splendid new love nest, and even at 100% LTV, assuming a 5% interest rate they’ll be paying roughly £1,492 a month.
Drag that mortgage out so the grandkids can benefit from watching mum and dad take over the grandparents’ payments and the monthly fee will be £1,262 – maybe not a huge saving in the scheme of things, but in the long run nearly a quarter of a million more pounds in interest.
In fact, even though a 100-year mortgage is available in Japan, most home loans that are taken out are for 30 years rather than the full century.
This is why the government needs to truly innovate – and it needs to look at house prices and availability rather than exotic loan products.
“It is not the mortgage market that is preventing people from becoming homeowners; it is the cost of property in relation to people’s earnings” Scott-Taylor Barr, a financial adviser, told Sky TV over the weekend.”
“I feel that Boris Johnson is coming at this from the wrong direction.”
Ian Mulheirn, chief executive of the Tony Blair Institute, agrees that this may not be the best approach. “It’s not clear that 50-year mortgages are the key,” he told The Times.
“The bank of mum and dad is already a major facilitator to first-time buyers, so it’s unlikely that formalising that with inter-generational mortgages will make much difference.”
Obviously, the key to making homes more affordable is to (said in a quiet whisper) make them cheaper – but to allow a drop in home values would be political suicide for any government – especially by one with cratering popular support.
Mortgage Intermediary Rob Gill agrees. “It seems governments the world over will do anything to avoid the alternative of property prices actually falling,” he told The Guardian.
Key mortgage numbers:
9.1 - The number of times annual earnings a full-time employee needs to spend on a house in England
37% - Share of first-time buyers taking out a 30-35-year term mortgage
10% - Share of first-time buyers taking out a 20-year term or less mortgage
£1,630.5 billion - Value of outstanding mortgage loans in the UK.