Borrowers must wait until later in life before they can make a big enough ‘dent’ in their mortgage repayments to enjoy a lower rate.
That’s according to research by mutual insurer, Royal London, which has analysed how much equity, on average, different age groups have in their properties at different stages in their lives.
It discovered borrowers in the 36 to 40 age group typically put down a deposit of 25% or more, which meant they were borrowing 75% of their property’s value. This level is the ‘tipping point’ at which they can access lower mortgage rates.
Yet, back in 2007, the age at which borrowers reached this point was much younger. Indeed, Royal London discovered they were, on average, in the 31 to 35 age bracket.
What’s more, in 2007 borrowers owned, on average, 70% of their home by the time they had reached the 51 to 55 age range.
But in 2018, people were more likely to have this much equity in their home by the time they reached 56 to 60.
Becky O’Connor, personal finance specialist at Royal London, explained moving up the housing equity ladder helped borrowers access better interest rates and made homeownership more affordable.
However, she said as the ages of first-time buyers had risen, families were having to wait until later in life before making a serious dent in their mortgage and therefore being able to benefit from lower rates.
She added: “For those who already own their own home, house price inflation is a windfall, giving them a bigger deposit when they remortgage and enabling them to access lower mortgage rates.
“But those still waiting to buy a home when house prices rise must stretch to a higher loan-to-value (LTV) initially and then face the likelihood of being stuck paying higher rates on the higher LTV for longer if the house price growth remains relatively flat.”
Progressing up the ‘equity ladder’
Loan-to-value (LTV) refers to the proportion of the property’s value the buyer is borrowing. Having a 75% LTV means the borrower owns 25% equity in the property and has a loan for 75% of the property’s value.
Royal London explained rates fall for borrowers as their LTV decreases and they own more of the equity in their properties. Those who borrow less than 75% of the value of their home tend to benefit from the lowest rates.
The climb the housing equity ladder, borrowers must rely on the following factors:
- House price growth – when house price growth is faster, borrowers move up the housing equity ladder more quickly.
- Repayment plans – those with shorter mortgage terms and those who make overpayments that reduce the capital balance will see the proportion of their borrowings in relation to their property value decrease more quickly.
- Whether borrowers take advantage of having more equity in their properties to remortgage and borrow more.
Older borrowers
Royal London’s research also found the percentage of borrowers aged 66 plus, and therefore over retirement age, with higher equity is also steadily rising.
It said 27% of 66 to 70 year olds now took out new mortgages with an LTV of between 30% and 50%, which was up from 21% in 2009.
Among new applicants in the 71 to 75 age group, 26% were borrowing between 30% and 50% of their property’s value, which is up from 23% a decade ago.
The most common LTV brackets for different age groups in 2018 compared with before the financial crisis (Source: Royal London)
| Age bracket of borrowers | Typical loan-to-value ratio in 2018 | Typical loan-to-value ratio in 2007 (before financial crisis) |
| 18-25 | 85-90% | 90-95% |
| 26-30 | 75-85% | 50-75% |
| 31-35 | 50-75% | 50-75% |
| 36-40 | 50-75% | 50-75% |
| 41-45 | 50-75% | 50-75% |
| 46-50 | 50-75% | 50-75% |
| 51-55 | 50-75% | 0-30% |
| 56-60 | 0-30% | 0-30% |
| 61-65 | 0-30% | 0-30% |
| 66-70 | 0-30% | 0-30% |
| 71-75 | 0-30% | 0-30% |
| 76+ | 0-30% | 0-30% |
