Tuesday 15 May 2018

HOUSING FOR THE MANY

Housing for the Many - Policy Suggestion
A New Mortgage Deal for Everyone

(C) Thomas Heavey Feb 2022


“A Labour Government will consider steps to enable more local authority mortgage lending to help local first time buyers” P20
HOUSING FOR THE MANY – A Labour Party Green Paper

The Housing Ladder Problem
It is clear that we are in the midst of a housing crisis, rising homelessness, repossessions, insecure housing and sky high rents. I have chosen to concentrate on the crisis surrounding young people and first time buyers and their difficulty getting a foot on the housing ladder. Not enough homes are being built and what stock there is, is prohibitively expensive and beyond the reach of increasing numbers of people.
Home ownership among our young people especially is collapsing, millennials are now described as ‘Generation Rent’ because it is estimated that by the year 2021, only 26% of young adults will have managed to get onto the housing ladder. Sky rocketing house prices and rent threaten to lock 20-40 year olds out of the housing market, depriving them of the ability to invest in themselves and their families.
As John Healey MP said “The housing market is broken, and current Conservative housing policy is failing to fix it”.
One of the solutions the Labour Party is offering, is to build high quality, truly affordable homes to enable young people and first time buyers take their first steps to home ownership. 
This response represents new thinking, a fresh approach as to how this can be achieved, whilst at the same time, complements Labours existing housing strategy. A solution that focusses in particular, on enabling young people and first time buyers to access instantly the existing housing market.
Supplied by Government and delivered by local authorities it will completely changing our thinking around the way mortgages are traditionally supplied. So radically different, that this level of change can only be delivered by a Labour Government. This proposal will offer our young people and first time buyers, the new deal that they so desperately need. A deal that will enable access to the housing market, a more comprehensive choice of the available housing stock and at a cost that leaves a substantial proportion of their disposable income, in their own pockets, improving the quality of their homes and lives.
The mortgage turns the traditional mortgage on its head and represents a valuable investment for the tax payer, increasing the value of every £ they pay in tax.


The Up-side-down Mortgage
The basis of the mortgage is that it provides the ultimate flexibility in how it is paid for to the mortgagee. As a young person or first time buyer they can begin their mortgage by paying the interest only. This has the effect of making the cheapest time to buy a mortgage at the beginning as opposed to the end, hence effectively turning the way we purchase a home, up-side-down.
As their careers develop, so they can start paying off the capital if they choose. This flexibility, which is missing from our current mortgage system, will ensure that at times when life decides to alter the circumstances of the mortgagee, they have a family, re-enter education, their children marry, want a holiday or if disaster strikes and they lose their job. They have a safety net where they can return to paying the minimum interest only payment and never have to face the trauma of losing their home.
The option is also there for the mortgagee to never have to pay off the mortgage which will be addressed later in the report. In this circumstance the mortgagee is in effect, using the home to give them the maximum possible level of disposable income.

Calculating the Mortgage Fund
At the time of writing the amount the mortgagee can borrow is based on a maximum loan of 30% of their total disposable income.
Today for someone with a disposable income of £10,000, this would only allow them a mortgage of £60,000 at 2% interest as capital repayments are included in this cost, giving a monthly repayment of £254. 

By changing the formula by which mortgages are supplied and funded, we can greatly enhance the mortgagees spending power, without increasing their monthly payment.

The formula is based on 30% of annual disposable income. At £10,000 disposable income per year the base line annual payment for the mortgagee is £3000.
The amount of funding available now depends entirely on how much interest is charged to the mortgagee.
If £3000 represents 2% of the total mortgage, then the mortgagee has a maximum fund of £150,000.
If 3% interest is charged, the fund now drops to £100,000.
And at 4%, the available fund reduces to £75,000.  
So the amount of interest charged is pivotal to the amount of funding available.
The lower the interest rate is kept, the better home and quality of life for the mortgagee and as will be shown later, the higher return on investment from the mortgage provider.

£20bn a year is currently spent on housing benefit. Instead, this money could provide 133,333 mortgages and at even only 2% interest, would create a gross income stream for the tax payer of £400m per year. 

The ‘Lock-in’
The mortgage can be used as a form of self-rent. With an interest being charged but the capital never having to be paid off. The advantage to the mortgagee with this type of arrangement is that unlike renting, their payment never changes throughout the life of the mortgage. As the cost to them, is based on purchase price and not market value.
With the interest rate being set by the government and not by the markets, the same interest rate can be set for the lifetime of the mortgage, meaning that it will never increase providing security and stability.
Forty years ago in 1979 the average house price was in the region of £20,000. Had we started this scheme back then, the average monthly repayment would have been £33 per month.
Forty years later in 2018, even without touching the capital, this mortgagee would still be paying £33 per month for their home and have a debt of £20,000.
Today, that property would be valued in the region of £200,000, more than enough to repay the original debt and to finance downsizing in property when the time comes, creating the building blocks for a comfortable old age and eliminating the worry of affordable heating, food and rent.

London
In London as with other areas of the country, housing costs can be out of reach for young people. Unable to afford a place of their own near their families, they are unable to buy or rent properties in the areas where they grew up.
Take a random London area, such as Islington North, the average house price in the area is £680,000. Far beyond the reach of many young people. The monthly cost of a mortgage in Islington on the average home is £2882 per month and also requires a deposit of 10% or £68,000.
If this scheme was available to them, the monthly payment could be reduced to £1,133pcm with the same terms, conditions and benefits applying. Areas currently prohibited by today’s mortgage system, could be brought well within reach, giving people greater freedom of the locations in which they choose to live.
    
What does this mean for the lender?
The lender will ultimately be the tax payer and to ensure that they are getting a good deal, the mortgage could be equity based although this is not essential, as the tax payer will effectively double their investment through rent and owning the debt on the mortgage without the need to remove equity.
On a £150,000 mortgage, if the mortgagee has paid only the interest on the property, then the equity share arrangement, will be determined by the lender and will range anywhere between 0-100% (dependent on the generosity of the lender).
The home could become an investment opportunity for the mortgagee, by encouraging them to make payments off the capital and earn equity in the property. Both lowering their debt and increasing their equity share.
At 2% interest, it will take a mortgagee 50 years to have paid an amount in interest equivalent to the original cost of the home. This means that the local authority will have made the return on their investment and still own the original debt which will be paid off once the property has no further use. However I expect the use of the property to extend well beyond 50 years.
Essentially, for the local authority, this investment has created an income stream where they can expect their original investment, on average to be at least doubled.

Home Inheritance for Future Generations
A home should belong to the family, not just the individual. When a home has been passed on then the original mortgage agreement, could be passed on with it to benefit either the children or grandchildren of the original mortgagee.
In 2080, if salaries rise by an average of 2% per year, the equivalent salary of someone earning £10,000 today would potentially be £45,000 by 2080. However the annual interest payment for the property will still be £3000 per year. Meaning that the percentage of disposable income needed to reside in the property has fallen from 30% to 6.15% and will continue to fall as long as salaries increase. Meaning that future generations continue to increase their wealth and security.

The advantages for the millennial home buyer:
 Highly flexible repayment plan.
 Mortgage can be based on 30% of disposable income meaning increased disposable income.
 Greater spending power meaning that the mortgagee can afford a property almost 3x the value they can afford today under current mortgage allowances.
 With enhanced quality of home comes an improved quality of life.
 With deposit free mortgage availability, the young person can get instant access to the housing market.
 Provides them with an investment opportunity (dependent on equity deal).
 Creates a return/profit for the tax payer.
 Creates an income stream for the local authority equivalent to the mortgage paid, less overheads.
 Increases the value of every £ the tax payer spends.
 Creates security in their homes by ending repossession.
 Creates set payments for entire length of mortgage.
 Creates low housing costs into and throughout retirement.
 Creates greater choice of the available housing stock.
 If housing price rises are under performing allows for return to interest only payments and investment can be sought elsewhere.
 Overall costs greatly reduced in comparison to a lifetime of renting.
 More disposable income created to enjoy life.
 Less money spent on housing benefit.
 More families living in their own homes.
 Could be £100's of £1000's better off compared to renting.


Disadvantages
 Mortgages can be lifelong.
 Could potentially pay more for the property if a repayment plan isn’t in place.
 May not be entitled to equity share.
 Responsible for own repairs and maintenance. (Also an advantage for the lender).

Mortgage eligibility
An optional discount on the mortgage or qualification for eligibility could be the requirement to be a member of a Trade Union or Trade Association. This is to provide the greatest security of interest payment and to ensure that the mortgagee enjoys the highest level of job security and career development, to complete the mortgage agreement.
The mortgagee must also be in full time employment, contracted employment, good history of self-employment. Zero hours contracted work will be illegible for qualification.

Funding Streams
Tax Payer
This creates a fantastic opportunity for the tax payer to increase the value of the tax £’s they spend.
Pension Schemes
An opportunity for pension schemes to double their investment and help to ensure their longevity of these vital schemes well into the future.
Private Investment
An opportunity for potential private investors to make a steady return on low-risk investment
New Central Investment Bank
Funding from the new Central Bank would create a return for the tax payer and provide the substantial capital needed to get ‘Generation Rent’ onto the housing ladder.
(Whilst the mortgage suggestion has been included in the Green Paper, I have also been informed that there is 'scope’ for funding from the New Investment Bank)


The Numbers
The numbers are there to be played with. There are many permutations of the direction they could take. How you play with them, depends entirely on what you want to achieve. The minimum is that after 100 years you effectively treble the value of the initial investment, double it after 50 years. So there is no doubt that profit can be made. This system it is a balance between profit and quality of life.


Private Rented Sector
A system of housing such as this will undoubtedly have effects on existing markets. The private rented sector has created a very profitable place for people wanting to invest their money. A property can create income in terms of rent and the appreciation in value of the asset.
Providing interest only mortgages removes the rental element to this investment and therefore makes the private rented sector, a far less attractive investment opportunity. Therefore I would expect to see many homes currently used as rental investment, to be released into the housing market.
Property investment will remain, but rent will be based nearer the cost price of a property as opposed to market value. The private rented sector will have to adapt by improving standards and reducing costs, in order to survive.

The Up-Side-Down Mortgage Could Seriously Improve Your Wealth
Today’s renters can pay a rent based on up to 80% of the market value of the property. If the rented property was valued at £150,000, then the rent would be based on a property valued of £120,000. This would give a rental cost of £509 per month.
Over the next 50 years, if the house value went up by just 1% per year, the rent being paid in 2068 would be £836 per month or £10,032 per year. Over this 50 year period the renter would have paid an eye watering £435,900 in rent on a home with a value of £150,000. At the end of which the renter owns no property and has earned zero equity in the property. The reason why this cost is so high, is because rent, is inextricably linked to house value, not purchase price.
With the Up-Side-Down mortgage, the interest payments on a £150,000 property start at £3,000 per year and never change. At the end of the same 50 year period the mortgagee will have paid £150,000 in interest, £285,900 less than if they had rented. In addition to this they have also earned the equity on the property which equates to £96,694.
Meaning that the over the 50 year period, the mortgagee is £382,594 better off due to savings made from rent and equity earned on the property, than compared to a privately rented home.
Essentially giving a real terms boost to the householders finances on average of £7,651.99 per year.

Traditional Builders
Changing the way mortgages are supplied may influence the ways in which builders build. I believe that they will build the homes to match the available funding and to a price and standard required by their customers.   

Freeing up the land to build
By improving access and purchasing power to the housing market, we could potentially create a new minimum standard in housing with the minimum value of a home being £150,000.
This would render many properties below this value redundant and of little use as an investment.
It is possible that the use of many older properties, below a £150,000 value would become redundant, freeing up land that can be re built upon with new, higher quality homes that regenerate an area and provides a better investment for the mortgagee.

Summary
This is just another option we could take in dealing with the housing crisis. In addition to making homes more affordable, we can also look at restructuring mortgages over longer terms, to bring the existing market, back within the reach of ordinary people.
We can provide the security people need so as they’ll never be faced with having their home repossessed, provide families a home they can call their own, end the scandal of homeless children and provide people with their very own investment opportunity.
The lower housing costs this will create will put more money into the pockets of ordinary people allowing them to live and enjoy a few more of the luxuries they want.
Young people and first time buyers can get instant access to the housing market. With no more years of saving for a mortgage the investment they make in themselves and their families can begin immediately.
For the tax payer, they will be spending far less on housing benefits and income support. And on top of this, the tax payer will also make a return on their investment, increasing the value of every pound spent, to use on the services we want.
Thank you for reading

Housing for the Many - Green Paper Response
A New Mortgage Deal for Millennials

©Thomas Heavey2018

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