At some point a few years ago, after the financial crisis had passed but the economic stats still showed the effects, while wandering down the posh bit of my local high street where all the top-end furniture retailers, Italian delis and estate agents reside, I suddenly got it.
I noticed that the ones carrying the White Company, Fenwicks and Russell & Bromley shopping bags were all roughly between 50 and 60. Despite the country apparently being in the doldrums, this well-dressed, insouciant and slightly aimless tribe had money to spend.
All the economic indicators were telling us GDP was still pretty flat, unemployment and wages were still struggling, food bank queues were getting longer and first-time buyers still couldn’t afford deposits.
The macro picture was gloomy. And yet, looking at this affluent little corner of the South East, everything seemed peachy – for this specific set, anyway.
I try very hard not to begrudge those more fortunate, by dint of the good economic timing of their birth, defined benefit pensions and so on. But every now and again I do get a pang at the injustice of being on the wrong side, age-wise, of the financial crisis.
The divide between those who were well on the property ladder before and those who weren’t on it, or only just on it, before 2008, is a wealth chasm over which, it seems, no lasting bridge can be built.
On that day in the high street, mulling over the disposable income these two-decades older people seemed to have, despite possibly being on lower actual incomes than my own, I worked out why: the low mortgage interest rates for those with lots of equity, compared with those for people just starting out.
Last week, a lender backed this observation up with some figures.
Homeowners with a 5 per cent deposit – a standard amount put down by first-time buyers, pay almost £300 more each month on mortgage repayments than those with 25 per cent deposits, according to the AmTrust Moneyfacts mortgage tracker survey.
Those with a 5 per cent deposit pay an average of £762 in monthly repayments on loans with a typical interest rate of 3.66 per cent – £294 more than the £468 paid each month by those with 75 per cent loan to value (LTV) mortgages on an average rate of 1.42 per cent.
AmTrust International said despite being lower than four years ago, when the differential was 3.14 per cent, the gap between the average rates for those with small and large deposits, currently 2.24 per cent has been widening again since the start of the year.
That first hurdle is getting intimidatingly high, while the early starters in the housing race stroll idly to the finish line, chucking fifties around as they go.
|75% LTV mortgage||95% LTV mortgage||Difference 75-95|
|Interest rate (average)||1.42||3.66|
|Monthly fixed payment (two years)||£468||£762||63%|
Amtrust put this widening gap down to the Government’s withdrawal of the Help to Buy Mortgage Guarantee Scheme, which has removed a kind of insurance for lenders to cover to the higher risk of offering loans to borrowers with smaller deposits and helped 95,000 new owners onto the ladder.
I get that the commercial imperatives of the lending business mean lenders have to charge varying rates according to risk. Lenders are not charities, they are businesses and one of their key functions is working out how to price risk fairly while maintaining their capital adequacy requirements and profits. Small deposit borrowers are higher risk, and the higher rates they have to pay are a commercial necessity. End of.
But we aren’t going to solve the problems of home ownership and wealth inequality by simply saying ‘tough luck’. The problem of risk averse lending is a chicken and egg problem: if buyers with smaller deposits are always paying a much higher proportion of their income on home loan repayments, they are riskier borrowers precisely because the size of their mortgages makes it harder for them to meet other costs of living.
Conversely, older, more equity-rich homeowners are less risky partly because they pay so little towards their monthly mortgage costs. They aren’t struggling with other bills because of a weighty mortgage, so there is less chance of them failing to meet repayments.
Amtrust said there is evidence that some lenders remained committed to the 5 per cent deposit market and may use private insurance in lieu of the Help to Buy Guarantee Scheme, which would be a welcome recognition of the problem and lenders’ ability – duty, in fact – to help solve it. For those banks and building societies that can be bothered with the additional risk assessments, there is clearly money to be made for the premiums first-time buyers pay over LIBOR.
But even with this additional effort from lenders, first-time buyers will continue to be effectively subsidising the easy living of their older, lower loan-to-value counterparts, who furnish their low cost but high-end housing with OKA trinkets and Multiyork sofas while newbie homeowners, with maybe a couple of hundred to rub together at the end of the month, head dutifully down to The Range.
Even if they can’t afford to furnish their new homes, first-time buyers might just be happy to be on the ladder and so be willing to overlook the continued injustice of the much higher interest rates they must pay. It hopefully won’t be long before they too benefit from lower loan-to-values and cheaper mortgages, but that depends on house price growth, which may not be reliable again for some time. You hear that? It’s the echoing sound of the Brexit drawbridge slamming shut.
An additional £300 a month is a significant extra burden for those probably also repaying student loan debt, saving for weddings and children and recovering from years of paying high rents. Lenders need to be mindful of their role in having caused this housing wealth imbalance, and willing to use the powers they have to help solve it.
Rebecca O’Connor is the founder of Good With Money and a former financial writer at The Times