It seems there are few things more certain in life than death, taxes and the fact that house prices in Britain continue to be immune to economic shocks. Ordinary workers have seen their cost of living rise and businesses continue to worry about their ability to “bounce back” amid continued pandemic uncertainty. Against this unsettling backdrop, the housing market is thriving.
In spite of the Coronavirus pandemic, house prices in many places have risen to record levels. This was helped in no small part by the Government’s temporary stamp duty holiday, intended to stimulate the market after several lockdowns, and the fact that people have chosen to relocate in search of bigger homes and outdoor space.
Official data from the Land Registry show the average sale price of a residential property in the UK rose by eight per cent in a year. Some areas saw increases of more than 20 per cent. After a brief lull in October following the end of the stamp duty holiday, the latest Nationwide house price index shows that the market saw double-digit growth of 10 per cent in November.
Rising house prices might be the new normal but this isn’t necessarily a good thing. This summer house prices surpassed their pre global financial crash peak by 30 per cent, according to Zoopla which measures asking prices. Economist and author of Why You Can’t Afford To Buy A Home, Joshua Ryan-Collins, has previously told i: “The UK is a pretty strong candidate for another massive bust in house prices.” This is because house prices continue to inflate beyond wage growth, becoming increasingly unlinked from the rest of the economy.
House prices have been rising across the country but it’s important to note that some areas are experiencing steeper rises than others. In England, it’s the North West. Across the UK, Wales has seen the greatest regional growth. And, while house prices in London broadly remain higher than elsewhere in the country, they are rising more slowly at the moment.
So, while this growth might mean windfalls for some homeowners (particularly in places where growth has been steep), it will also impact affordability for those without huge amounts of capital, in particular less wealthy first-time buyers. Perhaps that’s why we are seeing the introduction of longer-term fixed-rate mortgages from lenders such as Habito and Kensington Mortgages who have both introduced 40-year mortgages this year. It’s worth noting that the latter is partnered with Rothesay, the UK’s largest pensions insurance specialist which has more than £60bn in assets. Mortgage lending is big business for Britain’s financial services industry.
Longer-term mortgages keep monthly payments low and allow homebuyers to meet affordability criteria but borrowers with longer terms pay more back in interest over a longer period. So, the potential upsides of longer-term fixed deals include stability in the face of interest rate rises (the Bank of England will announce whether they will increase its bank base rate, which heavily influences interest rates, on 16 December) and that they give lenders flexibility on affordability calculations, particularly for those with smaller deposits and, therefore, a higher loan to value ratio.
Neal Hudson, a housing market analyst, explains that until recently, the average mortgage term of a first-time buyer used to be 25 years but, now, increasingly 30 or 35-year mortgages are normal. This is because mortgage terms are the bit of lending which is easier to stretch to make expensive housing “affordable”.
If house prices continue to rise, could longer-term mortgages become the status quo? There is global precedent. There are now some countries in the world where longer-term mortgages are the only way to keep housing markets moving. After an economic crash, Japan’s housing market stagnated in the 1990s. Prices fell but because of wage deflation people still couldn’t afford standard mortgage terms. To keep the market turning over, 100-year mortgages were introduced to encourage home ownership. These could be passed down through families and enabled people to buy homes they otherwise could not afford, but housing remains grossly unaffordable in Japan for the average worker.
David Hollingsworth is the associate director of communications at L&C Mortgages, the UK’s largest mortgage broker. Like Hudson, he warns that 40-year mortgages are a double-edged sword.
“Structuring a mortgage over a longer term than the once traditional 25 years will reduce the monthly outgoing and therefore appeals to those that want to build in a bit of breathing space in their monthly budget,” Hollingsworth explains. “However, the downside is that the longer repayment period means that you eat into the debt more slowly and end up paying potentially tens of thousands of pounds more versus a shorter term. Whilst it can help from an affordability perspective in the early stages it’s important to keep reviewing that approach.”
Longer-term mortgages have been around for a few years (Santander introduced a 40-year term in 2019 and a number of other providers such as TSB and Teco Bank also offer them). In 2019, MoneyFacts conducted research which found that 40-year mortgages were becoming more common. They found that 50.89 per cent of all residential mortgage products available had a standard maximum mortgage term of up to 40 years. That was up from 35.93 per cent five years before.
Stretching the borrowing term may reduce monthly payments and help homebuyers meet affordability criteria, but this isn’t a straightforward solution to increasing access to mortgages.
“[These mortgages] typically carry a higher rate than the shorter-term fixes but also because they will typically tie the borrower in,” Hollingsworth explains. “They can generally be taken to another property (referred to as porting) but that still doesn’t give any guarantees and can reduce flexibility. For example, there’s no guarantee that the lender will be able to offer a big enough borrowing if there’s a need to increase the mortgage when upsizing.” In such a scenario, a homeowner might have to move to another lender and incur a charge for ending a fixed-rate deal early.
There is another sticking point, says Hudson. “One of the big considerations with a long-term mortgage is whether you’ll still be paying it off in retirement.” There is, as he sees it, a question mark as to whether anyone over the age of 40 would ever be approved for a 40-year mortgage. As things stand, most lenders who offer these mortgages stipulate a maximum age at which they can be taken out which is usually 30 or 35 years old.
As ever, the housing market balances on a tightrope. A house price crash would hurt those who have borrowed the most and have the least but, if they continue to rise, those who want to own homes and don’t have huge amounts of cash to buy them with will need to look at creative ways to get themselves into more debt over a longer period of time to make it happen. But it’s a tradeoff: longer-term mortgages might just prop up our inflated market.
Vicky Spratt is i‘s Housing Correspondent