The History Of Mortgages In The UK

Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter One

Story Highlights:

In this introductory chapter you’ll find a detailed analysis of the past, present and future of housing in the UK with information about:

  • The origins of a mortgage – a dead pledge
  • Private renting and unscrupulous landlords
  • After 1918 – ‘Homes for Heroes’
  • Housing in the UK 1939-1955
  • Affluence in Britain: the 1950s and 1960s
  • The 1970s and 1980s – Renting or buying?
  • The 1980s: Dramatic increases in home ownership
  • The 1990s and spiralling house prices
  • Housing and the 2008 economic downturn
  • The credit crunch of 2008 and mortgage providers
  • The housing situation since 2009
  • Future challenges for housing in the UK

A look at the past of UK mortgages

Although we now take home ownership for granted in the UK, this hasn’t always been the case. One hundred years ago, the idea of owning your own home was an impossible dream for ordinary working people. So what has changed to make this a common aspiration for Britons?

In this chapter, we’ll consider the increasing rates of home ownership and which alterations have driven changes in where people live: from private renting through social/council housing to the increasing number of people with a mortgage. From a consideration of successive decades in the 20th century, we look at what the situation is nowadays for the housing market as well as what challenges await us in the future.

Origins of the mortgage – A dead pledge

A mortgage was originally a loan but a piece of land (or sometimes property) was offered in security for this debt. It was common for the title to the property to be transferred to the lender until the loan was repaid.

A Tudor style house in the UK

Did you know that the word mortgage actually comes from the French phrase ‘mort gage’, which means ‘dead pledge’? It was given this name to distinguish it from ‘vif gage’ or a ‘live pledge’. In 12th century, a live pledge meant that the borrower could use the income from the land to pay off the debt whilst for a dead pledge (mortgage), the borrower had to find alternative forms of income to pay off the money he owed. At this time, live pledges were much more popular since it was felt dead pledges encouraged usury, which was against the teachings of the Church.

However, there were a number of complications with these debts. If either the borrower or lender died or the lender passed the debt onto someone else, repossession of the property was highly possible and things were made worse by issues surrounding feudal obligations in the society of the time.

‘Mort gage’, the origin of ‘mortgage’, means ‘dead pledge’ in French

By the 14th century, live pledges had completely disappeared and mortgages didn’t really become popular again until the mid- to late 19th century when the first building societies were created.

Private renting and unscrupulous landlords

Despite the existence of building societies, borrowing money to purchase a house was limited to the more affluent classes in the late 19th century. The Industrial Revolution had encouraged ordinary people to leave the land and flock to the cities for work in the factories but the housing stock was little more than slums in many cases.

By 1900, 90% of British workers rented accommodation but there were always complaints that unscrupulous landlords were pushing up rents, which didn’t keep pace with increases in wages. The 1915 Rent Act made an effort to combat this problem by limiting the amounts by which landlords could raise the rent.

After 1918 – ‘Homes for Heroes’

By 1918, 70% of the British population were renting in the private sector but 1919 saw a massive change. The Housing and Town Planning Act (or Addison Act) was the first large-scale governmental intervention to build houses with the costs shared between local councils, tenants and central government (in the form of subsidies).

The concept behind the ‘Homes for Heroes’ policy was that working-class soldiers who had fought in the 1st World War were entitled to decent housing at an affordable price instead of living in Victorian-era slums. It’s no coincidence that this policy ran in parallel with the establishment of the beginnings of welfare provision for workers too.

Successive legislation helped with the construction of 1 million new homes (half of which were council houses). The Chamberlain Housing Act of 1923 gave subsidies for private builders to construct houses while the Wheatley Housing Act of 1924 made provision for central government to subsidise the building of large council estates.

In the 1930s the middle classes took advantage of the growing availability of mortgages with low interest rates to buy properties.

This housing boom continued into the 1930s with a concentrated effort to demolish slums and move tenants into new housing. This decade also saw the middle classes taking advantage of the growing availability of mortgages with low interest rates to buy properties in the newly-built suburbs on the outskirts of large towns.

Summary:

In early times, mortgages were loans which were secured against property, usually land.

The first building societies were created in the 19th century but the vast majority of Britons rented privately, often the victims of unscrupulous landlords.

After the 1st World War, there was a Liberal policy to provide decent housing for returning soldiers and council houses were built on a large scale.

The middle classes were able to take advantage of low-interest mortgages to buy newly-built houses in the suburbs.

Housing in the UK: 1939-1955

By 1939, the number of Britons owning their own home had increased to 27%. However, the outbreak of the 2nd World War put an end to further investment in housing. The availability of housing was also affected by bombing, which depleted an already insufficient amount of liveable accommodation.

In Post-war Britain replacing the damaged or destroyed housing became a priority for the government along with putting the welfare state into place as a result of the 1942 Beveridge Report. There were a number of problems facing the Labour government before they could put this policy into effect. These included material and labour shortages; a massive public debt; rising costs and the economic crisis of 1947. Despite these problems, a million new council houses were built between 1945-55 and there was more slum clearance.

Affluence in Britain: The 1950s and the 1960s

Throughout the 1950s and the 1960s, Britain went through a period of economic prosperity which was characterised by full employment and the doubling of real incomes: Macmillan’s “You’ve never had it so good”.

An image of central London in the 60s, a time when more people started thinking taking out a mortgage

Low housing prices and relatively low interest rates encouraged more people to think about taking out a mortgage. The Tory government actively encouraged the creation of a ‘property-owning democracy’ by measures such as reducing Stamp Duty and lending money to building societies so they could provide mortgages. This policy was largely successful with home ownership increasing from 29% (1951) to 45% (1964).

The 1970s and 1980s – Renting or buying?

During the 1970s, continued rises in population meant that there was a lack of social housing to meet demand. As a result, the Labour Party put forward the Housing (Homeless Person’s) Act of 1977, which stated that council houses would be allocated according to need. Those who didn’t meet the requirements could rent privately but many thought about buying their own house for the very first time.

Just 3 years later under a Tory government, led by Margaret Thatcher, legislation was passed to allow more people than ever before the right and the ability to buy their own home. This policy was set out in 2 policies: MIRAS and the Right to Buy Scheme. Let’s look at this ground-breaking legislation in more detail.

Questions:

Did mortgages in the USA develop in the same way as the UK?

America has never had a sustained policy of building social housing so the mortgage industry in the States developed on a separate path to that of the UK. The Depression (with a resulting half a million repossessions) and Roosevelt’s New Deal saw a radical change in the way the American mortgage industry was regulated and financed.

How many houses are there in the UK?

According to ONS (Office of National Statistics), there are 27.8 million residential properties in the UK (2013 figures).

How many people were affected by the slum clearances?

It’s estimated that in the Post-war period, 900,000 people Britons were moved out of slum housing.

How many Britons own their own home?

It’s estimated that there are 17 million owner-occupied properties in the UK.

How many people have a mortgage in the UK?

According to the FCA (Financial Conduct Agency), in 2014 there were 10 million outstanding mortgages accounting for £1 trillion which had been borrowed in total.

The 1980s: Dramatic increases in home ownership

MIRAS (Mortgage Interest Relief At Source) was one piece of legislation which encouraged more Britons than ever before to buy their own home. This allowed tax relief on the first £30,000 of any qualifying mortgage.

The other piece of legislation, the Right to Buy Scheme (set out in the Housing Act of 1980) gave tenants the chance to buy their council house. The prices were based on market valuation but tenants were also offered discounts of 33-50% to reflect the rents they had already paid and to encourage take-up. No down-payments were necessary but if they subsequently sold the house in a certain period, they had to repay the discount they’d received.

The Right to Buy Scheme gave tenants the chance to buy their council house

The money which local councils received for these sales was used to pay off their debts and they were explicitly banned by central government from replacing the lost council housing stock. This short-sighted policy would have serious repercussions in the coming years.

These two policies did more than anything ever before to dramatically increase the number of people taking out a mortgage. By 1991, 67% of Britons owned their own home (both with and without a mortgage).

At the same time, the 1988 LSTV (Large Scale Voluntary Transfer) policy led local authorities to transfer control of their housing stock to housing associations and regulated social landlords; the government was anxious for councils to surrender control of social housing.

Summary:

In the Post-War period, a million council homes were built to replace those destroyed by bombing despite the UK struggling economically.

Economic prosperity and government initiatives encouraged more Britons to purchase houses in the 1950s and 1960s.

Legislation restricting some people’s access to social housing in the 1970s and 1980 Tory policies meant home ownership became possible for more people.

The Right to Buy Scheme for council tenants, with generous discounts, meant a sector of the population had easy access to mortgages for the first time ever.

The 1990s and spiralling house prices

Beginning in the 1980s – and up to the early 1990s – the deregulation of the financial sector allowed the development of different types of mortgage to reflect the need to tailor the mortgage as a financial product to suit different people’s personal circumstances.

This change was dominated by the banks, which had always been more savvy about marketing and advertising than the more tradition-bound building societies. It paid dividends since customers increasingly applied to banks for a mortgage rather than building societies so that their market share went from 3% (1977) to 36% (1987).

Unfortunately, the demand for property beginning in the 1980s led to successive increases in house prices. Since 1993, these prices have risen faster than both inflation and real wages making it difficult for some people to find affordable housing. Increase in demand was also affected by the easy availability of Buy-to-Let mortgages starting in 1996.

Housing and the 2008 economic downturn

The large drop of 7.6% in house prices in 2009 was a big shock to property-owners who had assumed that house prices would continue to rise. This decrease was a knock-on effect of the economic downturn of 2008 and led to mortgages becoming less easily available and mortgage providers imposing stricter criteria to lend money.

More people have recently been renting instead of taking out a mortgage to buy a house

The sale of social housing in previous decades (and more importantly the fact that it had never been replaced) meant that accommodation became more and more difficult to find. Increasingly, those without a mortgage had to resort to renting privately so that the proportion of Britons with a private landlord doubled to 15% (often those who had taken out Buy-to-Let mortgages). The lack of availability meant it was a landlords’ market and rents increased accordingly with landlords being able to pick and choose who they rented to.

As far as social housing was concerned in this period, the rules were changed regarding Right to Buy Schemes; to be eligible, tenants had to have at least 5 years tenancy while the maximum discount was 60% or £75,000 (whichever was lower). Also, the council had to be given first refusal if the home was put on the market.

The credit crunch of 2008 and mortgage providers

The widespread defaults on sub-prime mortgages in the USA had an economic knock-on effect on all Western countries including the UK although there were fewer ‘bad’ mortgages and much stricter controls. However, some mortgage providers had a higher percentage of risky loans (offering as much as 125% mortgages) and some had funded their expansion and share of the mortgage market by borrowing. Some financial institutions had to be bailed out by the Bank of England whilst others were nationalised.

A slump in demand meant falling house prices with some mortgagees being faced with negative equity – or owing more money on their property than it was worth. This change in the property market also had an effect on the construction industry so that fewer houses were built.

Questions:

How many council houses were sold under the Right to Buy Scheme?

Since 1980, 1.5 million council houses have been sold under the Right to Buy Scheme although since 2014 it’s been abolished in Scotland.

How much are average annual increases in house prices in the UK?

According to research carried out by ONS, the average annual increase in house prices since 1980 is 6.9%, with the biggest increase occurring in 1988 (25.6%). In that period there have only been 7 years when house prices have fallen – mainly due to economic factors such as sharp increases in interest rates.

What’s the average price of a house in the UK?

The price of a house in the UK depends on so many factors, not least the area with houses in the South tending to be much more expensive. In a February 2017 report, ONS calculated that the average price of a entry-level property was £198,000 with prices in the capital averaging £423,000.

How much did the the 2008 economic downturn affect the housing market?

The number of properties sold in 2009 (when the downturn was felt by the average consumer) slumped to 0.86 million – compared to the peak of 1.67 million sales in 2006. (Figures supplied by ONS)/

The housing situation since 2009

Further regulations since April 2014 have meant that those applying for a mortgage come under greater scrutiny; mortgage providers must conduct a full affordability assessment of potential mortgagees concentrating on both income and outgoings. This tightening up of regulations has hit first-time buyers particularly hard especially young people.

Further regulations since April 2014 have meant that those applying for a mortgage come under greater scrutiny.

More and more young people are choosing -or perhaps being forced – to live at home with their parents because they can’t afford and/or can’t find property to rent or because they’re saving money for the deposit on their first home.

This difficulty has been recognised by the government, which has started a number of schemes which will help people get a foot on the property ladder or enable them to purchase new builds (and thereby help the construction industry after long periods of stagnation).

Summary:

In the 1990s banks increased their share of the mortgage market while increased demand pushed up house prices.

The 2008 economic downturn made mortgages less accessible whilst lack of social housing made accommodation more difficult to find and more expensive in the private sector as well.

The credit crunch affected many mortgage providers and led to a slump – both in house prices but also in the construction industry.

Since April 2014 checks of potential mortgagees are more stringent, which has particularly affected young first-time buyers who often continue to live with their parents as a result.

Government-run schemes are trying to address the problem by offering help for those who aspire to their own home.

Future challenges for housing in the UK

It’s quite impossible for anyone to predict with certainty what will happen in the future about the housing market since it depends on a number of variables including the country’s economic performance, which political party is in power and changes in society.

The proportion of single-occupancy dwellings continues to increase, due to later marriages and house purchases before marriage.

However, there are a number of challenges on the horizon. The first is the question of population. Immigration and an ageing population will continue to put a strain on the available housing stock. Closely connected to this is the changes in society. The proportion of single-occupancy dwellings continues to increase, fuelled by such factors as later marriages and house purchases before marriage. This decrease in the size of households will have an importance impact on the demand for housing in the future.

Another problem which is soon to reach crisis point is the number of interest-only mortgages. These were advertised in the 1990s as an easy way to make the most of the property boom. Some of the first are due to expire in 2020 when their homeowners will have to pay back the capital that they owe as a lump sum. Unfortunately, the FCA estimate that of these 600,000 mortgagees, only half have made provision to pay the debt back. The other half will possibly rely on putting their homes on the market and down-sizing. What the effect of a flood of houses being put on the market will do to house prices is anyone’s guess and that will only the first wave of interest-only mortgages.


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