A few thoughts on mortgages…

1980

In 1980 the average UK wage was roughly £6,000 p/a.  The average UK house price was approximately £23,300.  

2022

The average full-time salary in the UK is now £31,000, there or thereabouts.  The average house price; £281,000.

Wages increased by 416%.

Property prices increased by 1,106%

Something went wrong.

Forty years ago, a person in the UK could buy a house costing four times their salary.  Today, you are looking at closer to nine times the salary.

There are certain things that, in any civilised and developed society, should be free, freely available at a reasonable price, or free at the point of use.  I’ll give an example of each;

Free: freedom of thought, freedom of belief (not necessarily freedom to act on those thoughts or beliefs though).

Freely available at a reasonable price: utilities, food, shelter.

Free at the point of use: the national health service, fire and rescue, police and security.  

It’s a basic human need to have shelter; something to provide protection from the elements, other people, and in some areas of the world, the local wildlife.  Somewhere along the way, it was decided that shelter should cost money.  It started with taxes, or tribute to the local lord of the land, and became more sophisticated over time.

I’m not opposed to a home of quality construction costing money.  We live in a world in which money facilitates our society.  What I can’t get on with is the artificial inflation of house prices, as it seems to be in a system that is geared to transfer wealth from the working class to the upper class.  It’s not something that is immediately obvious, so let’s just get into it.

Supply and Demand

It’s widely accepted that when demand outstrips supply, prices increase.  In terms of property, this is known as a seller’s market.  Where there is more supply than demand, it’s a buyer’s market and prices will stall, come down, or at the very least slow their rate of increase.  

If people had to fund house purchases from their own savings, home ownership would be rare amongst the working class, and possibly amongst the middle class.  In this situation, demand and by extension house prices would be low.  So, if you want to create another revenue stream from property you need to create a new industry.

Student Loans

Hang on, I thought you were talking about property?  I was, but I’m going to take the scenic route.  A few decades ago going to university was a privilege, which was paid for by a system of scholarships, grants, and wealthy families.  Then, a system of loans was created to open up higher education to the masses.  As loans have become more common, the cost of a degree has skyrocketed.  

When you look at where this money goes, it’s the same transfer of wealth up the socio-economic ladder.  So much for trickle-down economics.

Mortgages

A few decades ago owning a property was a privilege, which was paid for by… etc etc…  Much like with funding university, a system of loans was created, and expanded, to allow people to borrow money to buy their own home.

Mortgages are a fantastic way to make money for lenders.  Mortgages can also be a great way for savvy investors to make money if they can leverage the margin between the rate of return on their investments and the interest charged on the mortgage.  My, somewhat controversial, take is that the mortgage system is flawed and that instead of making home ownership easier, it’s made it more difficult for the majority whilst transferring wealth from the working class to the upper socio-economic classes.

This transfer of wealth occurs as the banks make billions from their mortgage books, with these profits funding dividend payouts to the shareholders.  Granted, there are those who own a handful of shares in banks but there are also people, and investment funds, which own massive blocks of shares that enable them to receive huge payouts.

When looking down the list of the biggest shareholders of the major banks in the UK you see a trend, where the largest shareholders are not individuals but rather investment funds.  These funds are in turn owned by groups of investors, although it’s possible for funds to own units in other funds, but that’s a rabbit hole I don’t want to go down in this post.  The point is that when you follow the money you pay each month to your mortgage lender, much of the profit from that payment after deducting the costs of doing business, ends up in the pocket of those investors who own shares in the business.

Cost of Living Crisis

There’s an argument that the cost of living crisis is not so much about the price of pasta increasing, or energy bills rising, but rather than paying for your own home can be incredibly expensive.

When talking about the cost of owning property, it’s not enough to look at the monthly mortgage payment in isolation.  The total amount paid back to the lender is also important.  Take a £200,000 mortgage taken over a 40-year term, at an interest rate of 3%.  The total amount paid back over that 40-year period is just over £343,500.  3% doesn’t sound so bad, but when you think that you will pay over £143,500 in interest it seems a little less positive.  It’s also important to remember that in the UK mortgage market, rates are rarely fixed for more than a few years at a time.

If the true cost of borrowing was 3% in this example, you could say that the £200,000 mortgage should incur interest of just £6,000.  In this example, it would be very difficult for lenders to make money, but people would pay their mortgages off more quickly and have more money to spend on other things.

I have a suggestion, but it’s totally unrealistic.  Here goes…

Create a new mortgage product that is backed by the UK government.  This is available for first-time buyers and is not available to investors, or those who already own property.  

The mortgage would be offered for 100% LTV; so no deposit is required.  However, a fee is payable for the loan which would be charged as a percentage of the purchase price moderated by the earnings of the applicants.  This fee would be much smaller than the typical deposit required, at say 1%-2% of the purchase price.

The mortgage is interest-free; that’s right, no interest is charged.  In addition to the fee to take out the loan, a modest servicing fee is charged each month.  When the property is sold, there is a tax payable where a percentage of the profit made on the original purchase price is paid to the Treasury.

This would accomplish several things.  It would make payments more affordable.  It would also encourage long-term home ownership as the tax is only payable on sale of the property, not when the mortgage is repaid.  So, you would be encouraging people to make their first home a long-term proposition.  Slowing down the housing market in this way would also bring house prices down and level the playing field a little.  

It’s never going to happen when lenders can almost double their money on many mortgages through interest though.

What about FIRE? You plan is based on making money from property?

That’s correct.  My plan is heavily based on making money through property.  Is that hypocritical? To some extent, yes.  The thing is, the system is so vast, and controlled by groups so wealthy, that the only impact of me not investing in property is that I’ll be choosing to die on a hill for no discernable benefit to anyone.  It’s an unfortunate fact that we, as a species, have decided to build a society around money, and if you want to have the most enjoyable life possible, you need money.  

I don’t think my proposal for a new model of mortgages is contrary to property investing.  People could still choose to invest in property because there will always be a demand for new homes, and there will always be a market for rental properties.  Home ownership is not the immediate goal for everyone.  There are people who want the flexibility of renting, such as those on temporary work contracts or placements, or those who want to try living together before committing to a mortgage. 

I’m not against property investment.  I want a fairer system of home ownership.