We’ve come a long way as a property-owning nation since What Mortgage published its first issue way back in spring 1982. Twenty-five years on, around 70 per cent of us own our own home, compared to just over 50 per cent at the start of the 1980s, while the rented market has also changed considerably.
One of the earliest influences on such a dramatic increase was the right-to-buy policy, launched by Margaret Thatcher’s first government, which saw council house tenancies drop from one third of households in the early 1980s to just 14 per cent by 2002 as many people became home-owners for the first time. Meanwhile Housing Associations, or the private rented sector, have become an alternative choice for nearly one in five households.
These figures show that Britain is in love with owning property. Only the Spanish and Irish beat us with over 80 per cent of people owning their own home. In the US, it’s around 60 per cent, and 40 per cent in Germany, while only around one in three Swiss have bought their homes.
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How we borrow
The way we borrow money for a mortgage has changed beyond recognition too. Today the UK mortgage market is widely seen as one of the most competitive and innovative in the world. The move from a handful of products to more than 10,000 on offer now from over 125 lenders comes from a mix of political policy, technological automation and a robust economy. Yet there remain just two basic types of loan: the fixed-rate and variable-rate. The almost overwhelming range of products differ only in their pricing and features, tailored to the more precise needs of borrowers in a much more changing and fragmented market.
So what prompted lenders to compete so fiercely? Ray Boulger, industry expert and spokesperson for independent mortgage advisers John Charcol, pinpoints the mould-breaking decision by Abbey (then Abbey National) to widen its criteria for mortgage lending in 1983. He says: Before this, most borrowers had to save with a building society for about a couple of years to have a chance of a manager looking kindly on them and condescending to give them a mortgage, and only then when they had a deposit of at least 10 per cent. Mortgages were rationed until 1983 and were effectively subsidised by savers being paid less than they would have got in a free market.
Even by 1988, when Moneyfacts published its first product listings, there were only 65 lenders, most of whom were building societies who offered just one product, the standard variable rate, which tended to be around 1 per cent above the base rate. Only a few friendly societies offered a fixed-rate mortgage, but you only qualified if you were a member. Spokesperson for Moneyfacts Lisa Taylor says: Rates, features, income multiples, LTVs and fees were similar between all lenders. There were no fixed rates, discounts or any of the other types of mortgages which are common in today’s market. Rates were for term, so there were no short-term deals or offers, which would have meant little incentive to change providers. Endowments were still being sold, and many lenders used interest only loans.
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Product innovation
Following Abbey National’s lead, the market competition started to hot up in the mid 1980s when a new type of lender appeared. The early players included overseas companies, like Chemical Bank, Canadian Imperial Bank of Commerce, The Mortgage Corporation (later acquired by First Active) and UCB (later owned by Nationwide). They started to lend through mortgage brokers and introduced innovative products, such as self-certification mortgages (where you don’t have to offer concrete proof of income), as well as different types of interest rates, including fixed rates, capped rates and cap-and-collar mortgages.
Other innovative products, like the first sub-prime mortgage, launched by Kensington in 1995, allowed virtually anyone, regardless of their credit history, to obtain a mortgage, albeit at higher interest rates, as long as they had a deposit. They now account for around 6 per cent of new mortgage deals, according to figures from the Council of Mortgage Lenders (CML) and interest rates are much closer to mainstream deals.
Legal changes led to the Assured Shorthold Tenancy Agreement in the late 1980s, which allowed landlords greater rights to repossess their properties; they also led to the development of the first buy-to-let mortgages in 1996 backed by the Association of Rental Letting Agents (ARLA). Before then only landlords with large deposits could borrow money at commercial interest rates, but since the changes, buy-to-let mortgages have increasingly been taken out by small investors looking at ways to diversify their investment portfolio. By 2006 there were 750,000 buy-to-let loans, and the private housing stock had grown by 500,000, also reflecting the fact that young people stay in rented accommodation for longer and the increasing number of single-person households.
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Lifestyle lending
Products are now aimed at every age group and type of person to fit in with our personal beliefs and our needs at different life stages. You can get self-build mortgages, Islamic mortgages or Green mortgages. Retired people who need income to supplement their pensions can take advantage of lump sum, drawdown and flexible products, allowing them to take advantage of the capital invested in their homes. Offset mortgages, which combine mortgage balances and savings accounts, whilst allowing the accounts to be managed separately, therefore reducing the interest and the term of repayment, are also becoming popular with older borrowers. Offset and current account mortgages are now offered by over 30 per cent of lenders but were offered by only a handful of lenders before 2000.
Meanwhile younger people who are struggling to get on to the housing ladder have the option of the government-backed HomeBuy scheme and other shared ownership schemes, which allow you to buy a portion of the property now and further portions in the future. There are also products from lenders, such as Northern Rock’s Together Mortgage, which allow you to borrow up to 125 per cent of the purchase price if you are struggling to save for a deposit in today’s overheated market. And with property prices at 10 times the national average in some areas, particularly parts of London and the South East, co-buying with groups of friends is becoming an option with products on the market to cater for this new trend.
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Flexing affordability
From saving for a minimum of two years with a building society before you could even be considered for a mortgage, it is now possible to get an offer online within minutes.
Income multiples, the traditional basis for deciding how much you could borrow, have gone from the three times single salary (or two and a half times joint salary) to five times salary and beyond as lenders start to look at affordability to repay rather than simple monthly income in these times of high house prices. The reason why lenders can do this is that they have radically improved their risk management since the boom-and-bust days of the late-1980s economy and are therefore able to offer a wider range of products.
Technological advances in credit scoring allow lenders to assess the risk of a borrower’s defaulting on payments more accurately and to tailor products accordingly. Also today’s borrowers are much more aware of the power of negotiation, and those with large amounts of money have been able to secure better deals reflecting the amount of money they are able to invest.
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The science bit
What’s happening in the wider economy has also had an important part to play in product development. So for example, in the 1980s, when there was a booming economy lenders spotted the potential to develop products to cope with affordability issues. There were low-start mortgages, which were aimed at borrowers with good future earning potential, and 40-year loans.
When negative equity hit, in the early 1990s, there were specialised negative equity loans, which would offer loans over 100 per cent. Poor performances in the stock market in the late 80s and early 90s also led to the rapid demise of interest-only mortgages that were backed by endowments, PEPs or ISAs. Nowadays, over 75 per cent of mortgages are taken out on a repayment basis.
Since the Bank of England gained freedom to set its own interest rates in 1997, people are more likely to go for a tracker mortgage linked to the Bank of England Base Rate, rather than a discounted SVR mortgage, as there is more certainty that their mortgage rate will move with the Bank rather than at the lender’s discretion.
A strong economy and labour market have seen rapid growth in the housing market since 2000 coupled with people’s changing attitude towards debt. Low interest rates have kept debt manageable for most people, although mortgage repayments are rising once again. According to the latest Housing Market Survey report, a couple on two incomes buying their first property would have to commit one-third of their take-home pay to mortgage repayments, which is the highest level since 1990. However, mortgage arrears and repossessions remain at historically low levels.
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Getting advice
Twenty-five years ago, mortgage advice didn’t really exist because most products on the market were so similar. John Charcol was one of the few mortgage brokers around then and the way they did business was very different from today.
Ray Boulger says: Our main role then was to secure a mortgage for borrowers more quickly than they could get one themselves by saving with a building society. We did this by finding clients with money to deposit, and in exchange for depositing this with a building society we obtained an allocation of mortgage money. This was hugely different from today, where over 75 per cent of borrowers get advice from a mortgage broker and there is a huge choice of mortgages available. We now offer advice on a face-to-face basis and have a dedicated telephone advice service. In addition we offer an online execution-only service where borrowers can do their own research if they don’t want advice and want to apply online for a mortgage.
However, according to CML figures, over 40 per cent of people still choose a mortgage based on advice from a financial adviser, while nearly 30 per cent take one out because they have another financial product with their lender.
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House prices through the roof
But mortgage lending is only one part of the story. What has happened to house prices over the past 25 years? According to figures from Halifax, house prices have risen 6.5 times over this period, with the average house price now at just under £190,000 compared to £24,000 in 1982.
Stuart Law, chief executive of property investment advisers Assetz, explains: In the mid-80s the economy was doing well and interest rates were moderate, leading to steady house price growth but unfortunately this led to over-confidence and to a speculative bubble that could not be sustained through liquidity and the economy as a whole. House prices basically overshot sustainable levels, and with a significant interest rate rise putting most people on to 15 per cent-plus mortgages, it really knocked the stuffing out of the boom. Although there were some short-term problems with negative equity, the main problem was that house prices didn’t go anywhere in absolute terms from their peak in 1990 for another nine or ten years.
The hangover from the property bust lasted until the mid-90s, but as interest rates started to fall, public confidence started to grow again. By 1995, there was a dawning realisation that interest rates might stay low for the foreseeable future and after Labour was elected in 1997, and people realised the economy was not going to spiral out of control, especially when the Bank of England’s Monetary Policy Committee took charge of setting base rates, we have seen a 12-year boom in house prices.
Since the start of the new millennium, we have also seen the rise of property hotspots in some areas, where prices can rise significantly quicker than the national average. There are several reasons for this. Limited land availability in the crowded South East, for example, has seen recent rises in fashionable Mayfair and Chelsea of 30 per cent in a year compared to the national average of around 10 per cent. Coupled with too few new houses being built, this has distorted the house prices in some areas. Since becoming prime minister, Gordon Brown has already pledged to build 200,000 new homes, but evidence shows that already around 220,000 homes are needed and there is concern that there are too many flats and not enough family homes being built.
Stuart Law adds: Another reason there are property hotspots is crowd mentality. People are always looking for a location that is under-priced. And the prolific data available today from organisations like Hometrack can make the identification of locations lagging behind the norm quicker and easier.
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The future
So what can we look forward to over the next 25 years? Our experts remain cautiously optimistic about the future. Ray Boulger expects to see shake-ups and product changes as our population ages. He says: The market is so competitive there is bound to be consolidation, particularly among the building societies. The two areas where I expect to see significant percentage expansion are offset mortgages and lifetime mortgages.
Meanwhile Stuart Law predicts a sustainable economy and increasing house prices for the foreseeable future. Assetz does not believe inflation is likely to return to the highs seen over the last 50 years, but over the next 25 years it could be higher than the 2 per cent or so we have seen recently. However, the UK is not like many other countries. It has a buoyant economy, a central part to play in globalisation of the world’s economy and at the same time very limited land in the places where people want to live. It is this that will sustain house prices in the UK for years to come unless these key factors change.
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