Why zero deposit mortgages will make the gap between rich and poor worse

A common opinion in today’s media is that millennials have it all – flexibility in jobs, a greater freedom to travel, and all the information they need at their fingertips. However, if you dive a bit deeper into the statistics, things don’t appear to be as rosy as we first thought. Today’s young face longer commutes than those before them and are confronted by an increasingly out of reach property sector. Over the last 20 years we’ve seen nothing short of a collapse in homeownership amongst younger people. In 1995-96, sixty five percent of those with incomes in the middle twenty percent for their age owned their own home. In 2015-16 the figure stood at twenty seven percent.

Those looking for a reason as to why won’t have to search hard. In the UK, house prices have risen by more than two hundred and fifty percent since 2000, far outpacing any increase in wages, which grew by just sixty eight percent across the same period. With house prices growing so markedly, so has the mortgage amount needed, locking many out of the market.

The biggest beneficiary of this trend has been the private rental sector. As more and more people found themselves priced out of the property market, the sector grew by more than one hundred and thirty seven percent from the mid-1990s to the mid-2010s to accommodate them. As such, can it be a surprise to hear that at the age of 30, millennials rent privately at twice the rate that Generation X did, and nearly four times the rate that baby boomers did.

At this point, some of you might be shouting: ‘We need to liberalise the laws surrounding home finance’ – and I’d agree, to a point. It isn’t the costs of servicing a mortgage that make it so hard to get on the ladder – the most recent data on mortgages puts the average amount repaid monthly at £671.23. This figure is eclipsed by average monthly rent, which stands at £932. Furthermore, the historically low interest rates of the past few years means that those lucky enough to have a mortgage have it easier than previous generations in that respect.

The real stumbling block is the size of deposit needed for a mortgage. The average price of a house in the UK currently stands at £230,776. This means that the deposit needed for a ‘normal’ eighty five percent loan-to-value mortgage would be approximately £35,000 – a significant figure considering that average household income stands at £27,300. The knock-on effect of this is that the first-time buyer of today is, on average, both older and richer than that of the past.

In recognition of this, lenders have recently begun to experiment with alternative financial models. Several institutions including Lloyds and the Post Office are now offering some variation of a guarantor mortgage. So, what would attract a young person to this fancy alternative mortgage? I’d imagine the fact that one doesn’t need a deposit to qualify would be a particular selling point. ‘This sounds too good to be true!’ some of you may respond – and in this instance, you’d be right. To qualify for one of the above mortgages, the applicant needs a close family member to provide something as security against the loan. For the Post Office mortgage, a ten percent equity share in the guarantor’s house is used, whereas for Lloyds ten percent of the property purchase price must be deposited into a savings account held by mortgage lender.

As a caveat, I must make it clear that we need to see more flexibility and innovation in the deposit space, and any action intended to help make the dream of homeownership a reality for more prospective first time buyers should be welcomed as positive. But positive intentions mean nothing if the resulting outcome is anything but. Unfortunately, the above mortgages will likely heighten the gap between those who have, and those who do not. To qualify, an applicant would need to find a relative who either owns their own home outright, or one who has tens of thousands of pounds spare to use as a security – requirements which filter out many of those on middle and lower incomes. This has the effect of creating a two-tiered mortgage system, where those lucky enough to come from an affluent background will be given a disproportionate access to credit.

Whilst I disagree with the final outcome, I view the fact that institutions are exploring new models as positive. However, we need to see the buyer being empowered, rather than creating further reliance on the Bank of Mum and Dad – and further subjecting buyers to the lottery of birth. Clearly, deposits have grown to the point wherein they are unaffordable for most, and something must change. But lenders should look to reward agency with the applicant, rather than their background.

Matthew Addison is CEO of StepLadder