A recent article from the BBC has stated that homeowners who have moved house have attributed to a record proportion of mortgage borrowing in the first three months of the year as the group “dominated demand for property.”
A recent report from the Financial Conduct Authority (FCA) had illustrated that 42% of total mortgage lending went to this group, which marks a record amount since records began in 2007.
This rising mortgage borrowing from these groups is likely attributed to government incentives such as the Help to Buy scheme which on face value, reduce the price of house prices by decreasing the mortgage deposit rate to 5%.
This decrease in the price of mortgages has caused a spike in demand for housing as opportunistic homeowners utilised the scheme to potentially ‘upgrade’ their homes.
This rising demand has caused houses to rise in price across the nation to record highs with the Halifax index reporting a 1.3% rise in the price of housing in May to a record £261,743.
This increase in demand from the Help to Buy scheme has also been amplified in May as home buyers raced to complete purchases before the stamp duty holiday begins to run down at the end of this month.
At the same time, the supply inelastic nature of housing makes this price increase more drastic as the market is unable to increase supply as housing takes long to build, consequently, the effect of rationing is amplified as firms cannot upscale their operations fast enough.
Halifax said almost £22,000 had been added to the average house price since May 2020 marking an increase of 10.9% year on year with an annual growth of 9.5%, the Guardian reports.
These rising prices will likely benefit moving homeowners, especially those on fixed mortgages, as the rising house prices mean that some consumers will be paying a fixed mortgage for a house that has gone up in price, in other words, they will be benefiting from positive equity as well as an increased wealth effect.
However, although these rising house prices may have positive effects on current homeowners, they do pose a headache for those who are first time buyers.
According to the BBC, although current homeowners have massively benefited from the scheme with being able to move, first-time buyers have not experienced such luxuries as first-time buyers only saw their share of Help to Buy scheme loans increasing by 2% during the same period compared to the 27% increase of existing homeowners.
There are a few reasons for this, one of them is likely attributed to the level of income that first-time buyers have.
First time home buyers are likely to be younger individuals, these younger individuals will have had less time within work as some will have recently left higher education and university and some will have a smaller saving pot compared to a much older individual who already owns a home.
At the same time, young people have a lower history of borrowing money. This makes their credit rating lower as the lack of history means that banks have to take a higher risk when it comes to giving out mortgages.
And this higher risk will likely increase the price of a mortgage.
Consequently, despite a price cut in the mortgage deposit rate attributed to the Help to Buy scheme, new house buyers still have to bear rising mortgage costs due to their lower credit history.
This combined with their savings being low means that the cost of a mortgage will be relatively more expensive to these people as a percentage of their assets, consequently, even though a mortgage deposit cut is attractive, some may not be able to afford it or cannot take the risk, especially during the COVID-19 pandemic where job security can be low due to a national lockdown.
This is different to homeowners who likely already have a history of credit, due to their current mortgage or completed one, as well as the fact that current homeowners may have higher job security as they would have had more time to work within a specific industry enabling them to develop their skills thus making them a more valued asset.
Written by Hubert Kucharski