Mortgages, remortgages and deposits! Oh my: buy-to-let landlords bow out but first time buyers are hardly better off

New figures put mortgage approvals at a six month low whilst deposits for London property soar into the hundreds of thousands. The government promises more affordable homes, but London’s house hunters aren’t buying it.

The number of mortgage approvals fell for the second consecutive month in March to a six month low of 66,800 in the wake of poor property market performance in the first quarter of 2017, according to the Bank of England.

Although a reduction in mortgage lending could potentially see house prices stall, the Bank of England’s Financial Policy Committee warned last month that lenders are in a fragile position should borrowers subject to high rates of inflation and falling real incomes default on their payments.

It’s the economy, stupid

Falling mortgage approvals are no surprise given the weak performance of the property market going into 2017. Property sales have taken a knock since the 3 per cent stamp duty surcharge on second homes was introduced last year, and with another general election on the way in a matter of weeks, it seems that consumers are holding off purchasing property despite low base rates offered by the Bank of England until the economy stabilises.

“As the market gears itself up for another general election, it is vital that the housing agenda isn’t kicked into the long grass,” says Jeremy Duncombe, director at Legal & General Mortgage Club. “It is paramount that a plan to address the nation’s severe lack of housing supply features on the manifesto of every party.”

Lack of housing stock is forcing banks to battle it out to attract consumers to its mortgage deals. HSBC recently launched the lowest five year fixed rate currently on the market. “This is yet another signal that the mortgage market is more competitive than ever and lenders are scrapping it out to attract business,” comments David Hollingworth, mortgage expert at L&C Mortgages.

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Strapped for cash

With inflation at its highest level since September 2013, rising costs of living have forced struggling homeowners to remortgage. A recent report by Connells Survey & Valuation reported that growth in remortgaging in March was driven by homeowners hoping to cut down on monthly mortgage repayments. Remortgaging as a proportion of market activity has hit a five year high relative to March averages, representing 21 per cent of the valuations market, up from 15 percent in March 2016.

John Bagshaw, corporate services director of Connells, says: “For those struggling, remortgaging can offer tangible financial relief. With the low-base rate and property values increasing 6.2 per cent annually, many are seizing the opportunity to save through remortgaging at a lower loan-to-value ratio. This trend is supported by the latest CML figures which show a 22% rise in the value of remortgage activity. If the price rises continue and household bills balloon, we could see an ever greater number of homeowners turning to remortgaging to cut costs.”

Buy to let languishes

Stamp duty hasn’t been the only tax change to tip the market into uncertainty in the last year. New rules that came into force in April restricting mortgage interest tax relief by taxing landlords on income rather than profit, have been followed by a slump in investment. According to Connells, buy to let remortgages grew 3 per cent in comparison to an average March as crippled landlords sourced additional funds.

“Buy-to-let remortgage valuations have also seen a slight uptick,” explained Bagshaw. “While buy-to-let valuations are at half the typical average for March, those who have decided to stick it out in the sector are trying to recoup the loss of mortgage tax relief. With market rents not yet rising, one of the few alternatives has been to remortgage. More landlords have taken this path in March, given the lower cost of borrowing and higher property values.”

A recent Upad survey revealed that 47 per cent of private landlords don’t know what the changes in mortgage relief will cost them between now and 2020. 80 per cent said the changes would affect their rental profits, and 21 per cent said they would put the rent up as a result.

“Yet again it will be tenants that lose out,” said James Davis, CEO of Upad, “paying an ever increasing proportion of their net pay on rent. Whilst the government continues to see landlords as ‘political football’, it’s the 9 million tenants in the UK who will actually be hardest hit.”

Not a finger, let alone a foot on the ladder

Higher property values are casting a long shadow over first time buyers. Figures from Legal and General show that the much loved Bank of Mum and Dad (BOMAD) is a far mightier lending institution than the affectionate namesake suggests, providing help for 305,900 not-so-little birds to fly the nest in 2016, offering an average of £17,500 to each, and funding the purchase of £77 billion worth of property.

The figures place BOMAD amongst the top ten mortgage lenders in the company, playing a part in 25 per cent of all mortgage transitions in last year, and offering 57 per cent of homeowners aged under 35 help to buy. First Time Buyer valuations have slipped back to their five year monthly average after a promising February according to Connells.

Following Legal & General’s revelation that parents are responsible for over a quarter of UK property transactions, Mr Duncombe commented: “The figures showing a slight drop in mortgage approvals highlights the need for more support for first-time buyers, and indeed home movers, across the country.”

Insurance company Royal London posits that only around four million of those aged 25 to 44 stand to inherit from grandparents and parents living in owner occupied homes. Those millennials who don’t fall into this group are less likely to be able to take full advantage of the new Lifetime ISA which enables contributions of up to £4000 per year, which the government will prop up by 25 per cent to save for a home. Royal London argues that more support needs to be given to young renters who, bogged down by rent and high inflation, will not be able to benefit from the scheme as much as those with wealthy parents who can offload funds into the account.

Desperate for a deposit

Mortgages aren’t all that first time buyers have to worry about. MoneySuperMarket has revealed that London boroughs populated 16 of the top 20 areas with the highest average deposits, and named Hackney as sixth on the list of the top 50 areas with the highest average minimum deposits.

Westminster and Camden followed Kensington and Chelsea in second and third place on the list of the most unaffordable places to live, requiring deposits of £554,996 and £490,738 respectively, with 56.6 per cent required for a deposit in Camden. Shockingly, 27 years would be spent saving for a deposit in Camden based on average salaries.

That means that for a young person entering the workplace at 18 years old today, they will be 45 before they can afford to put down a deposit on a home. Even then, that’s assuming house prices don’t inflate as of today which is unlikely with Emoov’s price calculator suggesting house prices in Crouch End will skyrocket 104 per cent by 2027.

Kevin Mountford, banking expert at MoneySuperMarket, said: “As house prices continue to rise, the dream of owning a home becomes harder and harder to reach for so many people. For those who want to take their first steps onto the ladder, reaching the minimum deposit levels required causes serious financial strain and, as our analysis highlights, many might be priced out of their desired area.”

Where do we go from here?

It’s a sobering thought for London’s house hunters; spiralling deposit costs and a dip in mortgages suggest that the powers that be aren’t doing enough to help their young people climb the ladder, or reassure more moneyed investors that property is a stable investment.

We could blame the figures on market uncertainty, on confusion surrounding London life post-Brexit, or apprehension about the outcome of June’s election. On the other hand, legislators could stop playing the blame game altogether and start to consider what ‘affordable housing’ really means and how much they’ve got to lose should concrete plans to replenish the languishing housing stock fall by the wayside if they want to retain the young people who work and live in London and get the property market moving again.