In the organisation’s new Resentful Renters report, author Graham Edwards ‒ who founded real estate firm Telereal Trillium ‒ sets out how a new market for fixed rates lasting 25 years or more could work.
Creating such a market was one of the Conservative Party’s key housing pledges in its election manifesto, though it received a rocky response from brokers.
Edwards suggested that these deals would last between 25 and 40 years, be available up to 95 per cent loan-to-value, and with the choice of either having early repayment charges (over the first five to ten years) or without.
All loan repayments would be capital and interest, with a “step-up” payment option ‒ where the borrower’s repayments increase over time ‒ available.
The loan should also be portable to other properties, with all up-front charges added to the loan.
No stress testing
Crucially, the affordability would be assessed at the repayment rate.
The report argues that as the rate is fixed for the full term of the mortgage, an affordability stress test is effectively unnecessary, which would open up the market to the 1.83 million people it suggests are currently failing those tests.
And the report argues that even with a premium to cover the risks of people losing their jobs or repaying the mortgages early, “such products would be more than competitive on a monthly basis with current mortgages, or rental costs – while greatly reducing the deposit needed to become an owner occupier and thereby addressing the key obstacle to home ownership”.
Brokers hold the key
What’s more, the report suggests that brokers may hold the key in ensuring such a market is viable.
That is because while pension funds and other institutional investors have not traditionally invested in the long-term mortgage market “it is one that has attractive attributes for them – and would be quite easy for them to enter since the distribution of mortgages in the UK is dominated by independent intermediaries” rather than banks themselves.
Edwards suggests that the “interest rate would be set by the yield required by these insurance companies and pension funds plus a modest administration cost”.
He adds that preliminary discussions with “several significant market participants” have been held, with all of the firms responding “enthusiastically”.
Mark Versey, chief investment officer of real assets at Aviva Investors, added that institutional investors are “crying out” for suitable long-term investment opportunities.
He said: “Long-dated fixed-rate mortgages have the potential to match society’s need for affordable housing with pension schemes’ need for appropriate assets.”