With news this week that one in seven over 70 year olds are using their pensions to pay off their mortgage debt, the prospect of home ownership has got a whole lot less appealing. The fact that so many people are spending their entire life paying for a house or flat means that ‘home owner’ isn’t really an accurate description – ‘mortgage owner’ fits better.
Who’s taking on this debt in the UK? There’s been a reduction in mortgage lending in poorer areas, implying that the banks have been lending more responsibly since the financial crash. But a post on the Bank of England’s unofficial blog today reveals an interesting trend: mortgage debt is rising fast for the young despite the fact they are not seeing the wealth generation benefits that previous generations did.
Government schemes like ‘Help to Buy’ and ‘Right to Buy’ are part of a sustained effort to encourage ownership among young people and households with low or precarious incomes – in other words, those who would otherwise be priced out of the market. The schemes are designed to ensure more and more people take on mortgages, one result being a vast reduction in affordable housing options for the rest of society as councils are forced to sell off their housing stock.
The reasons why people want to buy are clear. Private renting leaves you at the mercy of landlords and estate agents who benefit from rising prices – while in comparison, home ownership carries with it a promise of security. In London in particular, ownership is often the only way to avoid being priced out of the area you live in, though with soaring prices it’s not an option for most people.
Aside from helping you stay put in the area you want to live, homeownership is increasingly seen as a way to save for the long term.
We hear so often that the UK has an aging population and the current pensions, health and welfare provisions are not fit to cope. With no significant investments to improve them on the horizon, people are faced with the prospect of providing for themselves and their family in an uncertain future. Amid this lack of other options, lifelong mortgages offer an opportunity to pay today for the possibility of more security in years to come.
But being indebted for a lifetime has its risks, for both individuals and society.
Mortgage borrowers are vulnerable to interest rate rises – so much so that just a 2% increase in the rates households pay on their total debt would mean having to find an additional £1,000 a year. A big ask, especially when most people’s incomes are still not rising.
People are often unable to provide a sufficient buffer for these income shocks, because being in debt tends to prohibit saving. There are 13 million people who don’t have enough savings to support them for even a month if they have a cut in income or have to increase repayment levels on a loan. In fact as a nation we’re saving at a lower rate than almost any other country in the EU.
Despite the long term nature of mortgage debt, and its dominance over all other aspects of people’s financial dealings – such as saving, spending, having an income in retirement – it is still associated with independence and usually seen as an accomplishment. This shines a light on the deepening cracks in the other areas of our financial lives, any solutions to the housing crisis need to take into account the complex role that homes now play in people’s plans for the future.
I wrote last year on how housing is used as a wealth generating asset for the richest in society. To some extent this same ambition – of turning houses into financial assets – is increasingly seen as an option for the least wealthy as well. But there is an important difference: for those who are unable to buy outright, mortgage debt brings with it the risk of long term financial insecurity – and as the new research cited above reveals, for many, the debt is not delivering on its promise.
Listen to our podcast on how the housing crisis is tied up with the financial system, and why we need to find a systemic solution to the problem.
Photo credit: Alex Pepperhill