Savills, the estate agency, has forecast a 14pc jump in lending from parents and grandparents because of the pandemic – equivalent to an extra £700m in 2021 compared to 2019.
By 2022, 154,000 first-time buyers will be receiving financial support from family. This will be a new high since the previous peak of 149,000 in 2017. The lending will account for 42pc of mortgaged first-time buyers and will total £5.8bn.
Covid-19 has disproportionately curtailed first-time buyers’ purchasing power. Not only are they most likely to have lost their job or had their wages reduced, but they have been hit by tightened lending.
Frozen out of the market
Mortgage lenders have withdrawn low-deposit mortgages en masse. In June 2019 there were 145 two-year fixed-rate mortgages for buyers with 5pc deposits and 287 for those with 10pc, according to Moneyfacts, a comparison service. Now there are just six and 55 respectively.
Kevin Roberts of the Legal & General Mortgage Club said that between April and May searches for “joint borrower, sole proprietor” mortgages (when the mortgage effectively has a guarantor) tripled, while those for “gifted deposit” mortgages doubled. Mark Harris of SPF Private Clients, a mortgage broker, said many lenders had tightened their policy on variable incomes, discounting bonuses and freelance income.
The changes mean many first-time buyers are no longer able to buy. Tom Bourlet, 32, is a travel blogger who lives in Brighton with his girlfriend. They had saved £20,000 towards a deposit and could have bought a house in the suburbs for £270,000 to £320,000 comfortably with a 5pc deposit. Now they are shut out of the market.
“It’s infuriating,” said Mr Bourlet. “I’m going to have to double or treble my savings in order to get a mortgage.”
Bomad to the rescue
Frances Clacy, Savills’ research analyst, said that historically, the role of “Bomad” (Bank of Mum and Dad) had increased as low-deposit mortgage lending fell.
Despite the volatile stock market and coronavirus’s impact on people’s personal wealth, a survey by her firm found that 30pc of those aged over 60 now felt more inclined to give first-time buyers financial support because of the pandemic. An additional 22pc said they felt more willing to downsize to release equity to provide financial support.
After the financial crisis, when banks look low-deposit mortgages off the market, Bomad lending boomed. In 2007, 118,000 first-time buyers received family financial help, totalling £2.9bn, according to Savills. By 2009 the number was 135,000 and total lending had risen by 76pc to £5.1bn.
This year Bomad lending will be down because of the property market’s overall depressed transaction figures. But as sales volumes rise, Bomad lending is expected to rocket. Savills has calculated that the average deposit needed by a first-time buyer will rise to 26pc by the end of this year, up from 23pc in December 2019.
However, some analysts believe low-deposit lending could return soon. “I am confident that 90pc mortgages will be back in weeks,” said Mr Roberts.
Lockdown as a catalyst
Coronavirus is spurring Bomad in other ways. Ben Morgan of Bradleys estate agents said that in east Devon first-time buyer numbers were “two or three times” normal levels and most had gifted deposits. “They have spent lockdown in the family home and now they and their parents think it’s time to move out,” said Mr Morgan.
Family lending is being used to boost purchasing power with other schemes such as shared ownership, in which you buy a proportion of the property and rent the rest. In the week to June 22 the number of shared ownership mortgage searches with a gifted deposit was 65pc higher than at the beginning of March, according to Twenty7Tec, a mortgage data company.
Can Bomad save house prices?
The withdrawal of first-time buyer credit is already affecting the market. In May properties valued at less than £250,000 achieved 97.5pc of the asking price, down by 2.1 percentage points on May 2019, according to Hamptons International, an estate agent. By comparison, sellers in the £250,000 to £500,000 bracket achieved 98.1pc, down by only 0.3 points year-on-year.
But if first-time buyers are shut out for long, the effects could filter up the chain, pulling all house prices down.