A new targeted equity loan scheme could help up to a million priority first-time buyers according to new Resolution Foundation think tank.
Its latest report examines who has lost out from falling home ownership in recent decades, why they can’t get onto the housing ladder, and how policy could help them.
The research finds that low-and-middle-income families (between 20th and 60th income percentiles) have seen by far a larger fall in home ownership since 2008, down 17.4%, compared to a fall of just 4% among better-off families.
In order to understand why, the research examines the characteristics of around eight million ‘potential’ first-time buyers – individuals or families aged 21-55 who are in work but not homeowners.
It then tests how many would pass the hurdles buyers must get over to secure a mortgage: a 95% loan to value ceiling; a 4.5 loan to income cap; and a view of lenders’ affordability tests.
The research finds that over half of these potential first-time buyers would pass the assumed income requirements for a ‘starter home’.
But just 16% pass the deposit requirement.
In fact, the typical potential buyer would have to save for 5.2 years to secure a 5% deposit and 1.3 million would need to save for over a decade.
Around one-in-three first-time buyers rely on the Bank of Mum and Dad to get them over this deposit barrier. However, this ‘bank’ isn’t open to everyone and risks leaving those without wealthy parents behind – fuelling inequality within generations.
Recent mortgage-related regulatory changes have helped some first-time buyers.
However, the authors of the report caution that any further loosening must reflect the repayment pressures prospective homeowners face.
After all, first-time buyer repayment burdens are currently as high as they were in the early 1990s and mid-2000s, while today’s geopolitical uncertainties mean that interest rates are as likely to rise as fall.
Policy efforts should therefore focus on delivering a double win for around one million priority first-time buyers who could reduce their housing costs and raise their living standards by buying a home.
The Foundation proposes a government-funded ‘Starter Deposit’ equity loan scheme, in which the state would provide a loan that could be topped by up to £3,000 of someone’s own money.
The report finds that a typical priority first-time buyer family accessing this scheme would spend £2,600 less a year on mortgage payments than they currently spend on rent, while also accumulating £1,700 in property wealth in the first year.
To target the scheme effectively, the loan size would be capped at five per cent of the lower-quartile price of a terraced home in each region.
This would allow first-time buyers using the scheme to buy homes worth up to £175,000 in the North West, and £325,000 in London and the South East.
The foundation claims this targeting would help priority first-time buyers get on the housing ladder, particularly those without access to the Bank of Mum and Dad, while avoiding the risk of the gains being eroded away with price rises.
It would also avoid the problem of poor targeting under Help To Buy where people who were already able to buy homes simply bought bigger properties.
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This article is taken from Landlord Today