By: Vadim Toader, CEO of Proportunity
If ‘Generation Rent’ is ever to get a foothold on the property market there has to be a paradigm shift in attitudes to funding.
Young people in their 20s and 30s, whose parents had a justifiable expectation of owning their own home at the same age, are today the most long-suffering losers in the property market.
What was once almost an enjoyable investment game – 5% deposits, plenty of affordable properties and modest rises allowing owners to climb the property ladder with ease – has become a depressing cycle of years of struggle to save enough for an average 20% down-payment only to be outstripped by soaring prices. Factor in rising rents and it’s no wonder millennials are feeling hard done by.
True, there have been attempts to give them a leg up: the government’s help-to-buy scheme and the stamp duty holiday were welcome boosts. But not enough. The current system is fundamentally flawed and only an intelligent re-imagining of the way we finance house-buying will make a significant difference and improve the prospects of millions of potential property-owners.
Finance is one of the two main challenges for first-time buyers – the other is finding the right property, at the right price, in the right place – and the biggest problem for 70% of UK first-time buyers is that they can’t save a big enough down-payment. On top of that, they are limited to 4.5 times their income and their salaries are not usually high enough to take out a mortgage to cover high urban property prices. House prices have far outgrown this equation and are ten times the income in some areas where people want to buy.
As property values continue to increase, these traditional mortgages have become more and more outdated and cannot keep pace with the reality of the current housing market.
It’s now becoming accepted that this way of borrowing is no longer viable for many aspiring home owners and that blended funding is an alternative option. Our solution is to offer an equity loan that boostsbuyers’ deposit savings and sits on top of the maximum mortgage secured from a mainstream lender. Essentially it’s a combination of current wages with future equity earned from the appreciation of the property.
With a Proportunity equity loan of up to £150,000, or 25% of the house price, buyers can borrow up to six times their income level and only need a deposit of 5%. This additional financial leverage closes the significant gap between what many UK borrowers can secure through a mortgage and the cost of their ideal home. It fast tracks most buyers by five years as saving for a deposit while renting can be almost impossible in large cities and the future equity adds to the overall affordability.
With this method the loan matches the term of the main mortgage and is interest-only monthly repayments – on a fixed-rate for the first five years – with the principal equity loan being repaid when a home is sold or the mortgage ends or is re-financed. It can be used for existing homes or new builds. And although created to help those purchasing their first home it is not limited to this type of customer and can also be utilised by second-steppers – those looking to move up the property ladder.
It’s an antidote to the seemingly a never-ending spiral of deposit-saving, giving buyers the chance to consider this type of second charge mortgage to boost borrowing capability. Although, at face value, it can seem like an extra cost, overall, that is offset by the interest rate savings that can be unlocked and, most importantly, it is a means to getting on that elusive first rung of the property ladder sooner rather than later and without bankrupting the bank of mum and dad.