The shape of lending to come

Lenders will have to be innovative in forging products that take account of the more flexible lifestyles of the borrowers of the future, says Neil Johnson, mortgage policy manager at the Building Societies Association

We have recently published research looking at the likely shape of the mortgage market in the year 2020.

This finds that customers’ needs are changing fast, meaning that lenders are going to have change the products they offer to serve this new-look market.

Even though house prices have recently fallen we commissioned the research because in the long term, we expect them to continue to rise above their recent peak.

The high level of property prices means that the age of first-time buyers has gradually been increasing, meaning that most people are unable to buy their first homes until their mid-30s. If property prices continue to rise the age of first-time buyers will also continue to increase as they find themselves having to save longer for deposits.

Against such a background, buyers who will not be purchasing their first homes until their mid to late 30s will find their housing careers running perhaps 15 years later than their parents’. Consequently, they will find that they may be paying their mortgages well into retirement, with all the attendant problems that implies.

We sponsored this research to look at how the mortgage market needs to evolve in the next few years to respond to such changes. It starts by looking at the changing demand for mortgages.

The research finds that a continuing rise in the number of individuals living alone will mean that mortgage lenders will be required to offer products that can be supported by a single salary.

But the research goes beyond the statistics and looks at why these people are single and how they live their lives.

What it finds is that individuals lead much more complicated lives than they did previously. Although historically they married at 25 or younger and then remained with the same person for the rest of their lives in relatively secure jobs, this is no longer the case. In future, individuals may have several cohabiting relationships in the course of their lives, punctuated by periods of living alone.

The same goes for employment patterns. With the job for life now a thing of the past, with the possible exception of some public sector roles, the concept of an individual slowly moving up through the ranks of an employer over a 40-year career is a thing of the past.

Instead, individuals have several jobs which may involve a number of changes of professions. This trend could also see them returning to formal education for a time, which will affect their incomes.

Also, self-employment is becoming an increasingly popular way of working for many people. This poses a fundamental challenge for a mortgage model that has long been based on mortgage holders enjoying a stable or improving income situation over the course of their loans.

In future borrowers will want housing finance that reflects this flexible way of life. It will need to be portable between not just properties but also tenures, recognising that borrowers may flit between ownership and renting several times in their lives.

Lenders will also face a fundamental challenge encompassing the varied income levels the borrowers of the future will have.

Finally, as individuals live longer the trickle-down effect of housing equity through the generations is happening less and less.

Asset-rich elderly home owners are finding that they have a relatively low incomes. At the same time, their children and grandchildren have high incomes but because the amounts needed for deposits are so high, are unable to buy property.

A number of lenders already offer products that allow borrowers to take advantage of the equity their parents have in their homes or have mortgages guaranteed by relatives. At the same time, the equity release sector is continuing to grow.

Our research suggests that lenders will need to come up with innovative solutions to allow families to use any housing equity they have to help those who do not have their own homes to get on the housing ladder.

The mortgage market has undergone a big change in the past 18 months as it has adjusted to the recession. But it is clear from our research that even when the dust settles lenders are going to have to undertake a fundamental review of their product ranges to ensure they reflect the changing needs of their customers.