Halifax raises LTV on new builds
What have the Halifax said?
The UK's largest lender will cut the minimum deposit requirements on new build properties from 10% to 5% on 1 July 2022.
Why is this important?
Housebuilders have frequently been frustrated by lenders' decision not to offer high loan-to-value mortgages to the new build sector, this will therefore be welcome news.
This is good news for housebuilders and new homebuyers alike. Homebuilders are readying themselves for the end of Help to Buy in March 2023, therefore any improvements in mortgage availability at higher Loan to Value (LTV) ratios will be welcomed by the builders of new homes.
First-time buyers looking at new build properties, without the benefit of Help to Buy, will also welcome the halving of the deposit requirement from 10% to 5%.
However, whilst this move helps with the deposit gap, it does not help with the income gap. At first glance, this is also good news for aspiring first-time buyers. The higher LTV reduces the deposit gap, but whilst aspiring first-time buyers may be able to clear the lowered deposit hurdle, the income gap may put the hurdle back to where it was before.
Solving the mortgage problem for one constraint (deposit) doesn't necessarily solve the mortgage problem overall when other constraints (income multiples) are still in play.
In a world where house prices are divorced from wages, income-based approaches to home buying, will not reconcile the gap between home buyers and the homes they want to buy.
If we want to champion homeownership, increase participation in the housing market and turn generation rent into generation buy, we need to reassess how we finance, purchase and own our homes. In our view, fractional ownership is the way forward, providing a way to fix our broken housing market.
The deposit gap
The deposit gap is the gap between the house price and the size of the mortgage offered. If we take the average UK house price of £290,000:
a 90% LTV mortgage requires a £29,000 deposit
a 95% LTV Mortgage requires a £14,500 deposit
The income gap
However, the income gap remains. The maximum Loan to Income (LTI) ratio for these new 95% LTV mortgages is 4.49x. This means the maximum amount you can borrow is your income multiplied by 4.49
The average full-time wage in the UK is £38,000. This means the maximum amount a homebuyer can borrow with this new mortgage product is £170,620 (£38,000 x 4.49).
If the average earner wants to purchase the average home then they need an income of at least £64,400, which is 70% higher than the average full-time wage. The income gap here is £26,400 (£64,400 - £38,000)
When the income gap becomes the deposit gap
Unfortunately for the homebuyer, if the income gap cannot be bridged, it must be filled by a bigger deposit. However, because mortgages are based on income multiples the deposit required is much bigger than the income gap. In our case, although the income gap is 'only' £26,400 the implied deposit gap is £118,469 (the house price £289,099 less the mortgage £170,620).
How much can I borrow?
To help you find out how much you can borrow and how much it will cost, you can use the twindig mortgage calculator which also has a link to our household budget worksheet
How do we fill the deposit gap?
In our view, the sheer scale of the deposit gap faced by homebuyers reflects the fact that house prices have become divorced from wages. Mortgages based on income multiples are therefore no longer fit for purpose, they have become the square peg trying to fit in the round hole.
The UK Housing market is very, very equity rich. Overall the loan to value of the entire UK housing market is less than 25%, and although there are 28 million homes across the UK, there are only around 11 million mortgages.
We believe that fractional homeownership is the way to fill the deposit gap. Help to Buy, which was launched in 2013, is a form of fractional homeownership and it is tried, tested and successful, around 1 in 3 new homes are sold through Help to Buy. However, the Help to Buy scheme will end in March 2023. We would like to see a fractional ownership home buying product launched to replace Help to Buy and for it to be available to the whole market, not just new build properties.