© Dan MItchell

When the owner of a house in the bosky lanes of Weybridge, Surrey, recently discovered its value had dropped to £1.75m from the £2m he paid a few years ago, he decided to shelve any plans to move. Instead, he took advantage of an attractive remortgage deal, refinanced at a lower rate and used the extra borrowing to improve and extend the home.

Jonathan Harris, mortgage broker at Anderson Harris and adviser to the Weybridge resident, has noticed a substantial rise in the number of his clients following suit. “It’s become the norm to stay put and extend, to make the best of what you’ve got. People are fixing for a long period and are looking to refinance while things are good in the jobs market.” 

The idea of tapping housing equity for all sorts of spending purposes is not new; but evidence is emerging that the unusual market conditions currently applying in the south of England have disrupted the normal patterns of buying, selling and borrowing. 

Analysis carried out for the FT by housing market analyst Hometrack has found the long-term correlation between the size of overall mortgage debt and housing market activity has gone into reverse in London and neighbouring areas. Equity-rich householders are capitalising on low mortgage rates.

Mortgage experts and lenders say those taking out more money against the value of their housing are using it for a range of things, from home improvements and paying private school or university fees, to helping children or grandchildren with housing deposits. 

As sales slow but borrowing quickens, FT Money looks at how the trend is playing out, where the extra debt is going and whether we should be worried about the growing willingness of owners to see their home as a potential piggy bank. 

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Slipping transactions, climbing debt

Across the UK as a whole, the total stock of mortgage debt — the balance of borrowing against repayments — rose by a steady, but unremarkable 3.8 per cent between the end of 2015 and the end of 2017, according to figures from UK Finance analysed by Hometrack. 

However, this conceals significant regional variations. Digging into the postcode area data underlying the headline figures, Hometrack found the stock of debt had risen in London by 7.8 per cent over the same period and by 6.9 per cent in “commuter” areas around the capital, compared with just 1.7 per cent in the rest of the UK.

Richard Donnell, research director at Hometrack, says: “We’re seeing less [transactional] activity in London and the Southeast, but debt is increasing. People in these areas are adding on debt at four times the rate seen in the rest of the country — though the level of debt relative to the total value of housing is low at less than 15 per cent.”

Declining housing market activity in the south of England has been showing up in official figures. Research earlier this year into the level of transactions between 2014 to 2017 found the number of property sales in London had fallen by a fifth in four years, while sales were up 13 per cent in the North West and 9 per cent in both the West Midlands and Yorkshire and the Humber. 

Neal Hudson, director of market research firm Residential Analysts and author of that research, found sales in the previous growth hotspots of the Southeast and east of England had also fallen, by 8 per cent and 6 per cent respectively. 

But the house price gains made over the past decade for property owners in these places have left a good deal of headroom for further borrowing. According to official quarterly data on the mortgage market published by the FCA and the Prudential Regulation Authority, the outstanding value of all residential loans in mid-2018 was £1.4tn. Compare that with the £5.3tn residing in UK housing equity that was calculated this year by estate agent Savills, and it is clear why homeowners might see an opportunity to free up some of the equity held in their bricks and mortar assets. 

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Savills’ research also showed how those in London and the south of England have benefited disproportionately from soaring house prices in the previous decade. The regions accounted for 87 per cent of total housing value gains since 2007. While less than one in eight homes in the UK are situated in London, they account for a quarter of the total value of the housing stock, compared with 19 per cent in 2007.

Agents lay part of the blame for falling transactions in the south of England at the door of stamp duty land tax, since reforms to stamp duty in 2014 and a new charge on additional homes in 2016 disproportionately affected the more expensive markets of London and the Southeast. Buying a £1m home incurs stamp duty of £43,750, rising to £73,750 if bought as an additional dwelling. 

Some buyers are blanching at such charges, choosing instead to remain in their homes and spend on expansion or improvements. For those who press ahead with another purchase, though, a bigger mortgage may be needed to cover the costs of higher stamp duty, says Mark Harris, director at broker SPF Private Clients.

Bricks and mortar cashpoint

Graham Sellar, head of mortgage business development at Santander UK, says the high street lender has seen a noticeable rise in people accessing their housing equity amid a slowdown in property moves, via so-called “further advances” on their existing mortgage arrangements.

“Anecdotally, we’re probably seeing one-third to one-half more further advances than this time last year. Customers are more confident to come back to their lender and say: ‘Can I borrow some of that equity back?’,” he says.

Mr Harris says about 60 per cent of his clients refinancing their mortgages are now asking to raise more capital at the same time, whereas the proportion in the recent past would have been closer to 40 per cent. “In a more fluid market there is less capital raising. That’s definitely changed in the last two years.”

Like Mr Harris’s Weybridge client, many people are doing so to fund home improvements or building work. But as the cost of education has risen over the long term, this has also become a motive for taking out a lump sum. Parents of university students who face paying a rate of over 6 per cent on their student loans from the moment they take them out are choosing instead to help their children by taking out a bigger mortgage at current rates typically below 2 per cent. “We do see more money coming out at this time of year for university fees,” says Mr Sellar.

Parents with children at private schools are also using housing equity to help with fees. These have risen by 49 per cent over the past decade, according to research by Lloyds Private Banking, which found private day schools charged an average of £14,000 a year in 2018. 

David Hollingworth, director at L&C, a mortgage broker, says borrowers in such cases might consider an offset deal, which allows the mortgage advance to be held by the bank and used to reduce or offset the interest charged on the loan. “Because the money for school fees is not all needed straightaway, parents can put it in the offset account and draw on it as and when.”

Older borrowers, many of whom were frozen out of the market when lenders drastically tightened conditions following the financial crisis, have also been returning to new borrowing in greater numbers after regulators have given the nod to lenders to new types of loan designed for “later life borrowing”. 

This year, several lenders have begun to offer “Rio mortgages” (retirement interest-only mortgages) which allow over-55s to borrow on a lifetime term. Since they are required to make regular interest payments, the interest does not “roll up” into the loan and borrowers are left with more of their equity when the loan comes to an end. 

“People felt they’d been excluded from the market. More lenders are looking to be flexible for older borrowers,” says Mr Hollingworth. 

Charts showing regional variations in changes in mortgage debt

The Bank of Mum and Dad or “Bomad” is also cited by brokers as a common reason for homeowners to make a call on their housing equity, using the money to help relatives take the first step on to the housing ladder. Andrew Montlake, director at broker Coreco, says: “Without a doubt that part of the market has grown in the past few years. In London and the Southeast, many of the first-time buyers that we see would struggle to purchase without the help of mum and dad.” 

What limits do lenders set on the uses to which borrowers may put their money? Most high street banks will be happy for those who pass affordability tests to use money for personal expenditure, but will pull up the drawbridge at the suggestion of lending for business purposes, paying a tax bill or gambling. Taking money cheaply out of property to invest in bonds or stocks is also frowned upon by mainstream lenders; but private banks are often willing to lend for such purposes — particularly where the borrower invests via the lender. 

Trouble in store?

Should we be worried by the growth of lending for non-property purposes, as people extend mortgages on homes that in some cases will have seen their prices fall in recent months and years?

In the years leading to the financial crisis, lax lending controls saw people tapping their housing equity at high rates of interest to spend on items such as holidays or to pay off credit card debts on consumer spending. Market experts say the tighter rules on mortgage affordability, put in place after the credit crunch, have changed the game when it comes to lending risks. In spite of loan rates being cheap in historical terms, lenders are obliged to “stress-test” borrowers’ ability to repay them even at notional interest rates of about 7 per cent. Lenders are also required to make sure the majority of their lending is no more than 4.5 times the borrower’s income.

Mr Montlake of Coreco says: “It would potentially be a worry if everyone was remortgaging at loan-to-value ratios of 90 or 95 per cent. But if you look at the amount of equity generally in properties, they’re not doing that. More properties are held outright than have a mortgage on them and there are trillions of pounds of equity held in property.” The average loan-to-value ratio on private housing stock is 14 per cent in the UK and 13 per cent in London, according to Mr Donnell’s estimates. 

Those who have not benefited by luck or judgment from the huge growth in housing equity that has swept over the south of England in the past decade may see the rise of debt in places where activity has slowed as another symptom of the dysfunction afflicting Britain’s divided housing market.

% Change in total mortgage balances v % change in median house price scatter chart

Those who have seen their house price soar — and the relative size of their mortgage shrink — have options unavailable to the younger generation of aspiring homeowners. Bomad borrowers, for instance, who use their equity built up during a period of soaring house prices to enable their offspring to pay today’s hefty price tags are accused by some of fuelling a damaging cycle of house price inflation.

But, as Mr Montlake points out, theirs may be a time-limited advantage: “It creates more of a gap between the haves who are lucky enough to have equity — or to have parents who have equity — and the have-nots. It will be interesting to see whether the next generation will be able to sustain it. The scale of lending by the Bank of Mum and Dad could well be a once-in-a-generation event.”

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