The Bank of Mum & Dad LLC (BMD) is one of Britain’s biggest and fastest-growing lenders, and the Newcastle Building Society has decided that it is time it had some competition.
Its new low-deposit mortgage product, designed for first-time buyers, explicitly bans contributions from the BMD. Whoever came up with the idea deserves a bonus, as it’s generated more buzz than a nestful of hornets.
But let’s drill down into the details. The First Step mortgage is a 98 per cent loan-to-value product with a minimum deposit of £5,000 or 2 per cent of the property’s value, whichever is higher. Buyers can borrow up to £350,000 over 35 years – for the record, the current average house price, according to Nationwide, is £271,079. If you borrow the maximum, you will need to save for a deposit of £7,000, not including fees. The interest rate is 5.25 per cent fixed for five years; it’s pricey, but low deposit products always charge more.
The obvious question is how the society, which was keen to stress that it is now “banning the BMD” when I contacted it, will prevent people with deposits coming from that source, or from other cash gifts and/or loans from friends and family, from accessing the product.
The answer is that customers will have to certify that they’ve saved for their deposit themselves during the application process. Needless to say, fibbing on the forms is not a good idea. It could invalidate the loan and potentially result in prosecution for mortgage fraud. Just don’t.
Now, sure, this is not the only low-deposit product on the market, and I suppose critics could argue that it is a gimmick. I wouldn’t be at all surprised to see social media commentators getting on their high horses and complaining that the society is being mean in producing a product that seems tailor-made for thrifty working-class customers while excluding the posh kids. It doesn’t actually do that, but whoever said social media made sense? I would gently suggest that these people touch grass (did I get that right?).
There is some very solid business logic behind the idea. Putting together a nest egg of several grand, while still making rent and covering other bills, requires considerable discipline on the part of the saver, particularly if they are in the early part of a career when the money isn’t so great. That person is probably going to be a good risk for the lender. They are going to do what it takes to pay their mortgage, come what may.
Secondly, those who can access the BMD aren’t short of alternative options. On the contrary, its growing influence has created a two-tier housing market in which the haves can get on the ladder and the have-nots are left pouring rent money away.
Figures from the trade body UK Finance show that first-time buyers in receipt of parental assistance can buy a home at an average age of just over 30, with an average household income of £56,000. Those without support start older – they’re usually more than 32 years old – and require a higher household income of £65,000.
Meanwhile, the estate agent Savills has found that just over half (52 per cent) of last year’s 173,500 first-time buyers received parental assistance, averaging £55,572. That racks up to a total of £9.6bn.
It is about time those without the advantages of affluent parents caught a break. This product, potentially, offers them one. It is certainly preferable to some of the alternative schemes designed to “help” people buy homes, such as shared ownership, where the buyer purchases only part of a property while being liable for rent for the remainder. I have previously described this as the worst of all worlds, and I am not alone.
Newcastle Building Society’s launch is particularly timely when one considers the dire state of the rental market. The latest figures from the Royal Institute of Chartered Surveyors prove it; rental listings in August dropped at the fastest rate since the pandemic. The upcoming Rental Rights Bill contains some much-needed reforms, but the unintended consequence is that it has given landlords the heebie-jeebies, and some of them are quitting. Tax rises have only exacerbated the situation. The inevitable consequence of this is that private sector rents, already running at painful record levels, will rise again and leave renters in a nasty jam.
We know that affordability in the owner-occupier market is highly stretched. Nationwide has pointed out that people are spending an average of 35 per cent of their incomes on servicing mortgages, which is nasty given that the long-term average is just 30 per cent. Now, consider that renters have to fund their landlords’ mortgages, costs, taxes and profits, before we add in the effects of a restricted supply, and you can see why things aren’t good.
I would imagine there will be considerable interest in this product, helped no end by the free publicity the society has generated. While its 30-plus branches are clustered in northeast England, the loan is available nationwide, and you don’t have to be an existing member to take advantage.
I hope it proves successful and that others dip their toes into these waters, which will bring prices down. There is a need for more like this to level a playing field in which the have-nots are left slogging through thick mud.
