Lend us ideas

AS IT STARTS to seem like mortgage rates have hit their peak, homeowners and house-hunters alike should be breathing a sigh of relief.

Yet the full impact of higher rates has yet to hit – with many mortgage holders on much lower rates about to switch in coming months, significantly increasing their costs and reducing their spending power. Also, rates are still far from affordable for many first-time buyers whose budgets were already stretched before the increases began.

The recent modest falls in house prices in Guernsey have done little to change the situation, so what can we do?

There have been suggestions that, in order to ‘fix’ the housing market in Guernsey, house prices have to come down, a lot. From a mathematical standpoint and looking at average salaries, average house prices and factoring in current interest rates then yes, that’s correct. Yet is it only correct because we still use the same type of mortgage products we have always used? We still rely on buyers having substantial deposits or wealthy parental guarantors and we don’t think creatively. There has been very little innovation over the years in terms of lending and we are now, for want of a better word, stuck.

So let’s say we do, artificially (don’t ask me how), reduce house prices. The issue is that this would impact not just new houses that are being built but also existing homes, including mine (and yours if you are lucky enough to have one).

We need to help people onto the housing ladder. How this is done though is rather trickier. Any forced lowering of house prices (impractical in any event) would only be temporary and would not necessarily help those needing support. It might make matters worse by providing the exact opportunity wealthy investors have been waiting for to snap up a handful of rentable properties at a cheaper price. It would put many of us who bought at higher prices under huge pressure and could tip many homeowners into negative equity, where they owe more than their house is worth.

The fairness of this measure is also questionable. Is it right to deprive those who have owned homes for many years of their ‘profit’ when they have invested in these properties over time and perhaps stretched themselves significantly to make it all work?

No, the key is working on how we better support those who want to buy and have already bought and to do this lenders and regulators have to be brave, innovative and community-minded. Culturally we have a fear of debt, worrying that it will only get us into trouble or put us at risk, whereas in reality debt can free us to own assets, such as homes or cars that we would otherwise have no chance of owning by saving alone.

Debt can allow us to take advantage of opportunities sooner than we might otherwise and can focus our minds and keep us on track over time as we work to repay it. We can all see the impact on the island of the States’ lack of borrowing in recent years – very little investment has taken place – and it works the same for many of us too. Sensibly-priced debt that is affordable and fit for purpose can be a huge benefit for many, especially when it comes to buying a home.

For those with no help from family, it is a long and tricky process saving up for a home while renting somewhere in the meantime and there is no guarantee that you will save faster than house prices will increase over time.

When I bought my first home in London in 2003, I was 27. Having just broken up with my boyfriend and preparing to move out of our shared rental flat, I was looking at a huge increase in rent and I needed a better solution. I saw an advert for a Bradford & Bingley ‘Stepladder’ mortgage. The basic gist was that they would give me a mortgage for 100% of the value of the property I wanted to buy, great for me as I had no deposit saved. They would also lend me five times (high at that time) my salary and to top it off they would only charge me interest on 70% of the amount I borrowed. This made my first three years of repayments significantly cheaper than my rent would have been in the same flat.

The catch? They effectively owned 30% of the property for those first three years. I worked out that if house prices increased by 7% per year or more (not an unreasonable assumption in most years), I would actually have ‘earned’ a deposit for my flat and the bank would have the same amount. If prices grew at more than 7%, I would end up owning more of the flat than they would. If house prices did not grow at all, I would owe them the remaining mortgage at the end of term and would have needed to find a new product and a new deposit but in almost all cases, I was going to be better off.

The mortgage broker was very worried about the product as he felt it was complicated. I, however, loved it.

At that time it was my only option, despite being in a good job. Nothing is without risk but in this case there was very limited risk that I would be worse off at the end of the initial period and every chance that I would not be. Not long after I set the mortgage up, the product disappeared, never to be seen again.

Had this innovative approach from Bradford & Bingley not existed, I would never have bought my flat and that purchase started a chain of events (and parties) that have impacted my entire life since then and brought me a great sense of security. I bought the cheapest flat in the area with the maximum amount I could afford using a product that took a gamble on me and my choice of home.

It’s about time lenders or angel investors took a gamble on Guernsey’s first-time buyers and others who need or want to move or borrow more affordably.

Some lateral thinking and a creative approach could iron out the risks that existed in the product I benefited from 20 years ago and also let everyone benefit from the positives such as sharing the benefit of house price growth over time.

Shared equity mortgages of the type I have described can be life-changing in terms of helping people independently get to where they need to be.

Other ideas include enabling local renters to buy properties they are renting using innovative loans, creating deposit loans for those who don’t have savings and development loans for properties in need of a little TLC. Introducing these creative new products (with local residency restrictions) alongside mortgages would help level the playing field for those going it alone.

Most people who want to get on the housing ladder are less concerned about the price of houses and more concerned about making the purchase affordable and having a home to call their own. There are so many ways mortgages can be tweaked – such as making payments lower in earlier years and having repayments grow (or shrink) with your income – yet local lenders don’t (yet) seem to have the appetite to help.

We can only build houses so fast and we only have so many houses. It is within our gift, however, to make sure that everyone who wants to buy a home has the means to do so, sooner rather than later and on their own terms.