With property values of this amount, even with a 10% deposit, borrowers will need to have a household income of more than £75,000 to fit the affordability requirements of most lenders. 

According to recent Office for National Statistics (ONS) data, the average UK annual salary is £35,724. 

This leads to a few questions. 

Who is buying these properties? And where are they buying when not buying in Greater London? Looking at one particular customer segment, the mass affluent, can help us shed some light on this. 

I have looked at some UK finance data and some Santander data to build a picture of the mass affluent (that is those borrowing between £500,000 and £3,000,000, with a household income of more than £75,000) and their activity in the market within the last 18 months.

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In this article, we will cover the purchase areas, average incomes and average loan to value (LTV) and consider the impact of a new government on this market.

 

The mass affluent profile

These people tend to come from all walks of life. We see young and experienced professionals, entrepreneurs, technology and finance professionals, lawyers and much more. You could be sitting next to one of these people and not know it or be one yourself. 

We can see that London and the South East are still the main areas in which we are seeing these borrowers buy, with c50% and c25% respectively. This is then followed by the East of England.

I also looked at the average household income of those who borrow between £500,000 and £3m, and the average income for this cohort was just under £150,000. When we look at those borrowing more than £1m, we can see an average income of over £500,000 and an average purchase price of just over £2m.

Interestingly, we can see that the mass affluent who purchase these properties tend to put down deposits of 30-40%. Considering purchasing at £1.75m for a person moving home attracts a £121,250 stamp duty liability, while those moving home purchasing at £600,000 attract a stamp duty liability of £17,500, it’s clear those purchasing at this property value have significant liquidity.

We can also see below that the average LTV has been increasing in the space, while the average purchase price has been steadily declining.

This could be due to a number of factors, including a change in appetite from lenders, as we have seen a number of lenders make changes in this space in recent months. Also, with the tightening of affordability, even the mass affluent may find the properties they once realistically desired are now out of reach. We can also point to increasing interest rates, which at this level of borrowing can make a big difference.

Even considering an interest-only mortgage, borrowing £1m at 4.5% will have a monthly payment of £3,750 per month compared with £2,083.33 if rates were to be 2.5%. A repayment mortgage would be £5,066.85 and £3,951.21 per month respectively.

We can see a similar trend below when we look at those borrowing over £1m.

 

The hidden ultra-high-net-worth

Private banks and private transactions tend to be the playground of the ultra-high-net-worth, which has its own ecosystem. This doesn’t follow the usual trends of the wider UK market and often these numbers are not reported.

 

New government

A new government has been introduced to the UK and it is planning to introduce VAT to private schools. A recent Telegraph article suggested this could fuel a further spike in property values for those properties in the catchment areas of grammar schools and outstanding schools. Labour have also pledged to build one-and-a-half million new homes over the next five years.

Increasing supply will help with demand, and basic economics teaches us that this could lead to a cooling in the property price increases we have seen in recent years; it will be interesting to see how these changes affect the housing market.

 

What do we do?

If property values continue to rise, purchasing a home within traditionally expensive areas, like the Greater London area, could only be an option for the mass affluent or high-net-worth. Lenders could consider slightly different loan-to-income (LTI) caps or affordability rules for the Greater London area. However, this could fuel house price inflation.

We have already seen innovation from lenders with maximum income multiples reaching five-and-a-half times income and, in some cases, as much as six or seven times income.

Higher earners may also have more complex compensation structures that may include restricted stock units or long-term incentive plans, wanting to use net profit or assets as income.

While this is a challenging and very competitive part of the market, I am sure we will see lenders continue to innovate and find ways to help customers purchase their homes.