If the leader of our council tweeted their policies rather than documenting them, we would demand their sacking, yet a president can tweet his intended threats of war, and we shrug our shoulders. Some risk is logical, others isn’t but who cares about logic?
Most decisions on investment carry a potential risk and potential return, and buying a home is no different.
Whilst home ownership in some countries has become a culture, in others it is not. In some countries, it is classed as an investment, and a real source of assets, in others, it’s a home.
In Europe, Romania has the highest ownership of 96%, the UK, 63.4% with Germany and Switzerland bottom of the pack at 51.7% and 42.5% respectively.(1)
Median wealth per capita is, however, quite different, with Switzerland ($229,059) at more than double the UK ($102,641), Germany ($47,091) and Romania at ($8282).(2) There are no correlations between wealth and home ownership on any chart I can see.
Perhaps the greatest drive to own is that of avoiding rent. Recent numbers show that private renters pay 35% of income on rent, and mortgage owners pay 18%.(3)
The trend is now worrying as homeownership for under 35’s is reversing at a worrying rate of knots.
With the government strategy (imported from the U.S., courtesy of the Koch brother’s blueprint) of impoverishing students with debt, the ability to muster a deposit, let alone a mortgage is further away.
Indeed 40% of buyers are in the top 20% of earners, and today, the ratio of borrowing on a mortgage to income is higher than any bubble over the last 40 years.(4)
In 2016, the office of national statistics, showed that working people could expect to pay around 7.6 times their annual earnings on purchasing a home in 2016, up from 3.6 times earnings in 1997.(5)
Whilst that points to a bubble, it doesn’t always have to pop, as earnings have clearly been suppressed over the last ten years via austerity, and indeed imported inflation via the likes of Brexit.
So what can the first time buyer do? The help to buy scam (sorry, ‘scheme’) allowed for a real drive in 2017 pushing first time buyers up to the highest level for the last ten years.
Those 365,000 purchasers needed all the help they can and one such leg up has been the Bank of Mum and Dad (BOMAD).
Amazingly, BOMAD is now the 9th biggest mortgage lender in the UK and helps fund 26% of all UK proper transactions.(6) It is no surprise that over 60% of those under 35 seek help from friends and family to help get on that property ladder.
For those of you helping fund a member of your family’s first purchase, there are two issues to consider:
Remember that any gift you make will not be outside your estate for Inheritance tax for seven years, unless it is so small as to fall inside exemptions; You are also able to use the joint borrower sole proprietor mortgage (JBSP) product to legitimately escape the extraordinary stamp duty penalty introduced in April 2016 on second homes.
The JBSP allows a family member to support a buyer financially without having their name on the property.
The first time buyer therefore benefits from not having to pay stamp duty and the parent doesn’t pay stamp duty at all as their name isn’t on the property.
Furthermore, the parents will not be liable for future capital gains tax on any sale of the property, which they would have been on a second property with their name on it.
Whilst there are few lenders offering these niche mortgages, the interest rates are actually comparable to normal rates on mortgages.
Other options include a springboard mortgage where a borrower can take a 100% mortgage as long as a family member provides a 10% deposit with the bank.
In today’s uncertain inflation backdrop, we should all remember that average interest rates are well above the current payment rate, so fixing, or at least stress testing at rates far in excess of today would be a wise move.
Peter McGahan is the owner of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.