02 June 2024

Will first-time buyers soon be relying on the Bank of Nanna & Grandad?

By Laura Sneddon, Head of Mortgage Sales at Hinckley & Rugby for Intermediaries

In 1960, the average first-time buyer was just 23 years old and paid a deposit of £595 on their first home (about £12,750 in today’s money), for which the average price was £2,189 (about £64,500 today). The standard mortgage term was 25 years.

Fast forward to 2023, and the average first-time buyer was 34 years old and paid a deposit of £53,414 on their first home, for which the average price was about £236,000. The average term had stretched to 32 years.

What’s more, during 2022 the number of first-time buyers opting for a mortgage term longer than 35 years was 17%, in 2023 it reached 20%, and by March this year it had increased to 23%. If that trend continues, within 10 years the majority of first-time buyers will be taking on 35+ year mortgages!

Is it any wonder that in 2023, with the average house price (all buyers) costing a massive 8.3 times the average annual income of £35,100, the market had adapted such that 67% of all mortgages were offered with a standard maximum term of 40 years?

It seems that we may be approaching a watershed moment.

The worrying reality is that if today’s average first-time buyer takes on a mortgage term of 40 years, they’ll be aged about 75 at the mortgage’s natural settlement date.

And coincidentally, 75 is the maximum age by which many lenders currently require a mortgage to be repaid.

It seems that later life lending can no longer be considered a niche demographic, because the stark reality is that it is fast becoming the norm.

Thank goodness for the Bank of Mum & Dad!

Many first-time buyers turn to mum and dad for assistance, some to be helped with the required deposit and some to be supported through inclusion on the mortgage application.

However, the Bank of Mum & Dad is generally only available to tap into if they are mortgage-free themselves, and have savings (or can free-up capital). If they can’t even get on the property ladder themselves until their late thirties and are still paying off the mortgage in their late seventies, how can they help their kids onto the ladder?

Will tomorrow’s first-time buyer be knocking on the Bank of Nanna & Grandad’s door instead…?

The 99 percent question

The government’s proposed 99% mortgage scheme, which had been widely anticipated for launch in the spring budget, ended up being scrapped. And there are many in the industry who think that’s a good thing.

However, a few 99% mortgages have reached the market from high street lenders. Although certainly helpful to first-time buyers who are struggling to get a deposit together, misgivings continue to be voiced.

Not only is there an increased risk of negative equity, it is likely that the borrower will pay a higher interest rate and will pay more in the long-term because they are financing more of the home’s value. And there is the probability that many people will feel compelled to take out a longer term to cope with the higher repayments, further fuelling the upward trend in later life lending.

Another option

There is no magic bullet for the later life conundrum, but Hinckley & Rugby Building Society has taken a creative approach to it. It’s a neat tool called Tailored Term, which can be applied to any of its mortgages (most popularly combined with Flex Together – the Society’s JBSP product that includes both family and friends).

Tailored Term allows joint applicants who have a significant age gap to share the mortgage over different terms. And the term for the oldest applicant is considered separately on a maximum age of 85. That means a couple starting out together late in life aged, say, 60 and 68 respectively, could have a standard Hinckley & Rugby mortgage on respective terms of 25 and 17 years.

It also means that a main applicant in their thirties could, for example, take on a 40-year mortgage and be supported by a relative aged 75 on a separate 10-year term. The flexibility to incorporate that extra bit of financial muscle could be what makes all the difference.

And even if the Bank of Mum & Dad can’t help out, Hinckley & Rugby’s door is open to grandparents, great grandparents, godparents, uncles, aunts, and pretty-much anyone else who wants to lend a hand.

Given the extraordinarily high cost of home ownership in the UK, later life lending is a reality that is likely to trend ever upwards. Short of a drastic overhaul of the system, it’s up to lenders to offer ever more innovative solutions to meet the need.

For more information about Hinckley & Rugby’s range of flexible mortgage products, please visit intermediaries.hrbs.co.uk

For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.