Long-term Mortgages as a Solution to the UK Housing Crisis – IFA Magazine
The UK’s mortgage market is predominantly fueled by short-term funding sources, resulting in inadequate services for first-time buyers and older borrowers.
In contrast to Belgium and Spain, where long-term fixed-rate options are embraced, the UK witnesses a staggering 90% of mortgages confined to 1 to 5-year terms. This creates challenges for two key demographics: first-time buyers grappling with stagnant loan-to-income ratios and outdated criteria, and older borrowers aiming to tap into their home equity.
Without a shift in funding strategies, the UK risks perpetuating this disparity, leaving vital segments of the population behind. The recent surge in capital raises and potential acquisitions signifies a growing acknowledgment of the necessity for more inclusive mortgage solutions.
Elliot Reader, Senior Vice President at investment bank Houlihan Lokey, shares insights on the potential of long-term mortgages in addressing the UK housing crisis:
“The major mortgage lenders in the UK primarily rely on current accounts and short-term fixed-rate deposits for funding. This heavy dependence on short-term sources hinders their ability to offer extended lending options, unlike Belgium, where over 85% of mortgages are fixed for 10 years or longer, and Spain, with over 65% falling in the same category. Conversely, the UK’s mortgage market is dominated by 1 to 5-year fixed-rate mortgages, constituting around 90% of the market.
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As a result, two critical segments in the mortgage sector face significant challenges. First-time buyers struggle to meet traditional loan-to-income benchmarks due to stress testing based on standard variable rates (SVR), which have not adjusted to the changing dynamics of house price growth versus wage growth. This discrepancy limits their borrowing capacity. Additionally, older borrowers are seeking ways to leverage the equity in their homes.
The sustained surge in house prices and affordability stress tests introduced in 2014 have left many first-time buyers unable to enter the housing market. Lenders are imposing affordability assessments at rates up to SVR+3%, restricting borrowing limits. Furthermore, approximately 40,000 interest-only mortgages are set to mature annually until 2032, leaving borrowers aged over 65 without follow-on products and no means to pay off their mortgage, thus compelling them to sell their homes.
These challenges will persist unless banks pivot their funding strategies and offer flexible mortgage solutions that align with the public’s needs. Otherwise, the UK’s mortgage market will continue to lean towards shorter-term options, leaving first-time buyers and older borrowers underserved.
Addressing the specialized needs of the market remains a crucial capability in demand. We anticipate increased capital raising activities as firms catering to these underserved segments expand. Additionally, we foresee major banks exploring acquisitions to enhance their capabilities, thereby converting and retaining their existing deposit base as mortgage customers.
