Aug 2011 – Mates mortgages

The housing minister has suggested that friends could club together to take out a ‘mates mortgage’ but it’s not quite that simple, says Bernard Clarke from the Council of Mortgage Lenders

While lending criteria for first-time buyers appear to be slowly improving, an average deposit of 20 per cent means that stepping onto the housing ladder is still too big a stretch for many. So, at the housing minister’s latest first-time buyer summit, he urged more lenders to help by offering mortgages to groups of friends pooling their savings to fund a deposit. ‘Mates mortgages,’ the media dubbed them. But do they really offer a solution to the beleaguered first-time buyer?

The minister’s argument was that if there are groups of friends capable of making monthly mortgage payments but struggling to fund a deposit, lenders should offer the “straightforward option” of enabling them to club together and take out a mortgage. The trouble with mates mortgages is that they are far from straightforward.

Risks

The risks associated with them have deterred both borrowers and savers. Only a relatively small number of lenders offer them, and take-up by consumers has never been large. For more than two decades up to 2005, we collected data on the number of mortgages taken out by three or more people. During that period, loans taken out by multiple borrowers accounted for considerably less than one per cent of all first-time buyer advances – never amounting to more than a few hundred a year.

One of the main problems with mates mortgages is that all borrowers remain jointly and severally liable for repaying the loan. When borrowers understand the implications of this, they quickly decide that borrowing on this basis is not straightforward at all. The idea of a mates mortgage becomes a lot less attractive once borrowers realise they may have to pay up in full if one of their ‘friends’ decides not to.

At first glance, mates mortgages appear to offer a solution to the affordability problem for first-time buyers, but their lack of flexibility often chafes with the lifestyles of young people living together as friends but who do not have a really close relationship. What seemed like a good opportunity to get on the housing ladder becomes an unwanted responsibility when six months later that dream job comes up in a city 200 miles away.

The reality is that many of the attractions of home-ownership – independence, the freedom to choose what to do with your own property, and the prospect of capital growth (at least, when house prices are rising) – are much less appealing when you have to share them with other people.

What the statistics actually show is that once first-time buyers struggling to find a deposit look carefully at their options they decide that it is not a mates mortgage they want after all, but the opportunity to rent privately. The latest findings from the English Housing Survey, published last month, confirm that private renting – a tenure that had been in decline for more than a century – is now growing strongly. Since 2005, the number of households renting from a private landlord has increased by one million to 3.4 million – or by more than 40 per cent.

Home-ownership

Over the some period, the survey also shows the first significant decline in home-ownership. In 2005, there were 14.8 million households in owner-occupation. Now, the total stands at 14.5 million, or 67 per cent of households.

There has also been a subtle change in the balance of owner-occupiers, with more people owning their property outright and fewer buying with a mortgage. Over the last decade, the number of homes owned outright has grown by more than 20 per cent, from 5.6 million to 6.8 million. At the same time, the number buying with a mortgage has declined from 8.5 million to 7.9 million. Much of this is explained by the shortage of first-time buyers in recent years, coinciding with a large number of ageing baby boomers coming to the end of their mortgage term.

But it is not all bad news for lenders. A report on public attitudes to housing in England, published by the Department for Communities and Local Government on the same day as the latest data from the English Housing Survey, shows that 86 per cent would buy their home out of choice. Only 14 per cent would prefer to rent.

So, the housing minister is right in highlighting that aspiration to home-ownership remains strong, and that the key challenge is access for many first-time buyers. But if mates mortgage are likely to remain a niche product, what other options are there?

Other options

One possibility we are exploring with house-builders is an indemnity scheme that may be able to help first-time buyers who are unable to pay large deposits. Potentially, this is a solution that could be attractive to a housing minister looking to extend home-ownership beyond the privileged few who get help from the Bank of Mum and Dad. Potentially, it could also help builders at a difficult time in the construction market, and make a modest contribution to improving housing supply.

It would be wrong, however, to imply that there are easy solutions. Or, given the continuing shortage of funding for home-ownership schemes, that they may be capable of helping large numbers of buyers. We will, however, continue to work with house-builders and others on solutions that may have more to offer than mates mortgages.