By David Alexander, Managing Director
For those who can afford to buy, the residential property market is looking decidedly rosy. Choice across the spectrum has never been greater while the new-build sector – in terms of “green” production values, energy and sound insulation, labour-saving devices and general home comfort – just gets better and better.
But amid all this good news there is one debilitating factor: consumer finance for housing seems to have gone backwards rather than forwards. Unlike the level of housing stock, finding a way to pay for it, for most people, means a conventional capital-and-interest mortgage. The only detectable flexibility is the extension of the traditional 25-year term to 30 or even 35 years – a symptom of longer life expectancy and the fact that mass university education means many more first-time buyers are entering the paid labour market at a later stage than their predecessors.
How different this is from 30 years ago when in addition to standard mortgages, endowments (interest-only loans backed by investment-linked life insurance policies) were still going strong, shared equity schemes seemed to be the next big thing and there were the enticing prospects of a new range of home loans linked to pensions and ISA savings schemes. Then everything seemed to come to an abrupt halt – in no small part, I believe, linked to the societal changes that followed the political assassination of Mrs Thatcher, arguably the greatest peacetime prime minister of the 20th century (there – I’ve said it and make no apology for doing so).
Now lenders are playing things by the book and while one cannot fault their recently-found penchant for financial responsibility (well, better late than never), consumer options appear to have declined.
Take shared equity. Homeowner aspirants could initially “buy” a share in a property (say 50 per cent) and increase their equity as and when this could be afforded. True, shared equity could be expensive to service, but at least it got people on to the home-ownership ladder when they might otherwise have been unable to do so. And of course, lower equity means less to find in a deposit on a mortgage so it seems this option would appeal to those youngsters struggling to find the substantial down payments demanded by lenders today.
I would also like to see the encouragement of “rent to buy” schemes in which applicants (after passing a rigorous financial test) move in to a property purely as tenants for a reasonably lengthy set period (to provide some continuity for the investor). This would be done with a view to eventually becoming owners, either gradually or purchasing outright at some future stage. Such a scheme would work in Scotland only if given dispensation from new legislation, which effectively has ended conventional lease periods, and is unlikely to encourage investors. However, if it helps younger people move seamlessly from renting to owner-occupation perhaps even Holyrood might be prepared to listen.
Now to a lesson from recent history. Consider a typical couple who bought a new home with an endowment mortgage in 1970. Twenty-five years later not only would the loan be paid off but the pair could look forward to a substantial tax-free bonus based on profits from the investment returns. But although these payouts were impressive, returns from more recent policies had started to bomb although a stock market downturn was not the only reason – there was also massive mis-selling.
However, with the stock market revival and interest rates on the up, perhaps there is a case for a revival in the endowment mortgage, just as long as those targeted by sales agents are those with the appropriate lifestyles (as opposed to selling to every Tom, Dick and Harry just to earn commission).
It’s a flexible world and the more financial options available, the better it will be for today’s home-buyers.
This article was originally published in The Scotsman on 14 December 2017 as David Alexander: Financial products must match property choices.