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The new Labour government has promised to build 1.5 million new homes over the next parliament, with the aim of helping millions of people onto the housing ladder. Labour also plans on working with local authorities to give first-time buyers the chance to buy homes, and to introduce a permanent ‘Freedom to Buy’ mortgage guarantee scheme. The time is right to consider the effect of these initiatives on the mortgage market, particularly in relation to term lengths, affordability, and the availability of green mortgages.
Therefore, the time is right to consider the effect that this could have on the mortgage market, particularly in relation to term lengths, affordability, and the availability of green mortgages.
Further, UK Finance has recently published its . A review of this makes interesting reading.
Term lengths and affordability
According to the latest product sales data from the FCA, mortgages with terms longer than 35 years are now the fourth-most common product sold. These are behind only 20-25-year, 25-30 year, and 30-35-year products, sales of which are decreasing, with the 35+ year products filling that gap.
Research from the Yorkshire Building Society (YBS) shows that a fifth (21 percent) of 18-to-34-year-olds and three-fifths (59 percent) of 35-54-year-olds are unsure if they will ever own a home or are not planning to do so at all. And this is despite Labour’s house-building promise.
YBS’s research also shows that not purchasing a home could result, astonishingly, in being nearly £3m worse off over a lifetime. This is based on the price difference in renting or buying over the 55-year period from age 33, the current average age of a first-time buyer, to 88,the current life expectancy. Over this time, a borrower would pay £367k in mortgage payments, while a renter would pay £1.6m in rent. And a borrower would own a property worth £1.7m after this time. A renter would not, and their ability to pass on wealth would also be greatly affected.
With this picture in mind, it’s good to see 100 percent mortgages making a comeback. Aimed at long-term renters, these often come with enhanced affordability criteria to be met, such as the amount being borrowed not being allowed to be more than the equivalent of what the applicant(s) pay each month in rent. Whilst these can be a good option for some, the enhanced affordability criteria and limits on lending mean that there could be better options for others. This is particularly the case if they have another way of funding a deposit, for example through a gift from family.
In a world where affordability continues to be an issue, what would be greatly appealing in would-be products that are both cheaper than a ‘standard’ mortgage and that also reduce outgoings. It just so happens that such products exist.
Green mortgages
Firstly, it’s important to note that these mortgages are not ‘green’ in and of themselves; neither the lender nor the product are required to conform to any ESG standards.
They work instead by offering incentives to buy an energy-efficient home, or make energy-efficient improvements to a property, by offering a discount below the lender’s standard rate, typically of between 0.1 – 0.15 percent.
The outcome should be a home that is cheaper to run and, if the mortgage was used to fund home improvements, has greater appeal when the time comes to sell it. Although, it should be noted that the savings are relatively modest in this area, currently being less than £20 a month, over 25 years, for the median mortgage of £180,000. There is work to do in making green mortgages a strong option for most borrowers, particularly in relation to the Consumer Duty and ensuring that the products customers buy are designed to deliver the benefits they expect and represent fair value.
Mortgage arrears
The number of homeowner mortgages in arrears is broadly unchanged from the previous quarter and remains low, at 1.10 percent of homeowner mortgages and 0.69 percent of buy to let mortgages.
Given that we have seen a prolonged period of Bank of England base rate increases since January 2022 (the decrease of 0.25 percent to 5 percent last month was the first decrease since March 2020, at the start of the COVID-19 pandemic), this is good news. While many households remain stretched, the pressure on the cost of living has begun to ease.
For those that are struggling, lenders should want to offer help and support and offer a range of appropriate options for this. These are often customers that should be considered vulnerable. As well as the provisions of MCOB 13, it’s important to have the FCA’s vulnerable customer guidance, as well as the Consumer Duty, front of mind when designing policies, procedures, and processes that ensure good outcomes for these customers.
It’s also worth having a look at UK Finance’s recently published mortgage arrears and possession statistics.
How can Bovill Newgate help mortgage lenders and brokers stay on top of market changes?
Our Wealth and Consumer Finance team are experts in supporting both mortgage brokers and lenders, and can offer guidance on the regulator’s expectations or discuss any of the above points with you in more detail.
We can help by providing both lenders and brokers with keeping affordability assessments and lending criteria up to date with the latest industry developments. Our team can provide bespoke solutions in line with your unique risk appetite, ensuring you remain competitive whilst remaining compliant with the responsible lending criteria and, for brokers, FCA’s requirements for demonstrably suitable mortgage advice.
It’s important to stay focused on the Consumer Duty, and on delivering good outcomes for your customers. This includes ensuring that consumers are provided with suitable products and services that are designed to meet their needs, characteristics, and objectives. We can provide specialist, independent assurance on policies, procedures, and workflows for both advice and underwriting to make sure this is the case. Our specialists can recommend improvements where necessary to ensure your Consumer Duty obligations stay ahead of the curve, and that your customers remain satisfied.
For lenders, we can also help with designing or providing assurance on policies, procedures, and processes around common issues such as disclosure requirements, responsible lending, and arrears and forbearance, while ensuring good outcomes for consumers under the Consumer Duty.
Our are experts in supporting both mortgage brokers and lenders, having supported hundreds of clients over the years., and can offer guidance on the regulator’s expectations or discuss any of the above points with you in more detail We understand the regulator’s expectations, and the level of detail required in documentation.
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