Index-linked mortgages to come
Indexed mortgages linked to inflation would help more first-time buyers onto the property ladder, according to a report from Morgan Stanley. The report, Financial Innovation and European Housing and Mortgage Markets, said that soaring house prices and the inability of income to keep up, against a backdrop of increasing personal insolvencies and bankruptcies have left the UK mortgage market in dire need of innovative products.
Index-linked mortgages would be linked to inflation rather than the base rate, or having a fixed rate.
Chief economist at Morgan Stanley, David Miles, said: “They would be very similar to the index-linked bonds the UK Government uses to issue debt loans. Instead of a fixed rate, or being linked to base rate, you pay a certain amount in excess of inflation.” Knowing that their mortgage repayments were connected to the inflation rate would help consumers better predict what their repayments would be. Miles said: “This is not a new concept, but in an environment where house prices have risen so much, this kind of loan has more benefits than ever before.”
Although repayments would increase with inflation over time, they would start at a lower rate than most current standard mortgages, thus making the process easier for first-time buyers.
Morgan Stanley has seen the popularity of 90% loan-to-value products with short-term introductory fixed rates decrease as they have not been totally suited to potential homeowners. The report also suggested that lenders should look further at shared-ownership arrangements independent of a government subsidy. Yorkshire Building Society is one of the four lenders in the Open Market HomeBuy scheme and a spokeswoman said that they had always considered the possibility of starting a shared-ownership scheme of their own, and were using the Government scheme as a pilot.
There is also a trend towards 100% mortgages as buyers are finding it increasingly difficult to save any kind of a deposit.