Boris Johnson argues that this new plan “could create two million more owner occupiers, the biggest expansion of home ownership since the 1980s”. But how?
average new mortgage costing 2.14% a year, it has never been cheaper to finance a purchase, and the divergence between the costs of buying and renting further strengthens the incentive to buy. But regulation makes it impossible for many.
Rules imposed in the aftermath of a financial crisis caused by dodgy lending require banks to check not just whether applicants can afford the offered interest rate but whether they would still be able to if rates were three percentage points higher. That, together with the need for a chunky deposit, raises the bar to home ownership. According to a recent report by the Centre for Policy Studies , there are currently more than 3.
The government wants to make this happen. Boris Johnson, in his party conference speech on October 6th, argued that doing so “could create 2m more owner-occupiers, the biggest expansion of home ownership since the 1980s”. But how? Britain’s mortgage market is dominated by banks and building societies which generally fund themselves with short term borrowings and deposits, and offer fixed rates only for two- or five-year periods to avoid a big mismatch in the duration of assets and liabilities. In Denmark, which has had a system of very long-term fixed-rate lending since the 1850s, the market is served mainly by specialist lenders funded by long-term bonds.
A 25-year loan priced at around 4% is an attractive asset in a world in which a 30-year British government bond yields just 0.9%, so thebelieves that it should be possible to attract insurance companies and pension funds, which have long-term liabilities, into the market. The way mortgages are sold may explain their absence. Brokers, who arrange 70% of mortgages, have an interest in selling clients new products every two or five years rather than one that would last for a quarter of a century.
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