The UK government is offering backed mortgages with 5% deposits. Young people deserve more than these government backed loans, and here’s why…
- The current situation
- The main proposal
- What’s the problem with this?
- What do young people need instead?
- The next steps
The Current Situation For Young People
Economically, young people have been hit hardest by the Covid-19 response.
The vast majority of redundancies due to Covid-19 have been felt by young people. A total of 287,000 18-24 year olds and 172,000 25 to 34 year olds have lost their jobs during the pandemic.
This does not include the 4.7 million who are currently furloughed or the unknown number who have taken pay cuts. Therefore, it is likely the number negatively impacted is much higher.
The furlough scheme is a lifeline for those who would otherwise have lost their jobs, providing them with some income during this challenging period. However, for low earners, living off 80% of your salary is hardly going to pay the bills.
With some people furloughed for nearly a year now, personal debt is likely to be racking up for those who are struggling to pay their rent or bills.
Additionally, nearly two thirds of single adults aged 20-34 are now living with their parents. It would be naïve to pretend this isn’t at least in part due to their financial situation.
Of course, we are aware that, for the most part, we are incredibly fortunate health-wise and are not as likely to be at risk of serious illness or death from Covid-19.
I also don’t believe that anyone begrudges the sacrifices made to protect the more vulnerable. No one wants to see people die and people will willingly do what it takes to prevent this.
However, that’s not to say the economic impact on young people should be ignored. Coming out of this crisis we will be faced with a generation in crisis, who urgently need support.
The Main Proposal
The government proposal is designed to support first time buyers.
The plan is to provide incentives to lenders to provide mortgages to buyers with just 5% deposits who wish to purchase properties worth up to £600,000.
The Government will then offer lenders the guarantee they require to provide mortgages covering the remaining 95% of a property’s price. Essentially, they are offering government backed loans.
Prime Minister Boris Johnson said: “I want generation rent to become generation buy and these 95% mortgage guarantees help to deliver this promise.
“Young people shouldn’t feel excluded from the chance of owning their own home and now it will be easier than ever to get onto the property ladder.”
What’s the Problem?
There’s a few key problems with these government backed loans. That’s not to say people won’t benefit from it, just the target market won’t necessarily reap the rewards as intended.
Firstly, the scheme is not limited to first time buyers. Anyone can take advantage of it.
It’s also not limited to those at the lower end of the income spectrum, who are likely to be struggling more to get on the property ladder. To buy a £600,000 property with a 5% deposit, you’ll need a household income of around £150,000 a year. For reference, the average household disposable income (after taxes and benefits) in 2020 was £30,800.
Given the wide scope of the scheme, there’s a worry this could cause a surge in demand on properties, much like the stamp duty holiday did. This has artificially inflated house prices, pushing property ownership even further out of reach for many first time buyers.
The problem with 5% deposits
Finally, there’s concerns about buying a property with just a 5% deposit. Is it fiscally responsible for the government to be encouraging people to take on such a great financial risk? Even with government backed loans, you could still end up losing your home.
You only have to look back to 2008 to be reminded that nearly 10 million Americans lost their homes during the Global Financial Crisis, often having been sold risky mortgages.
Will a generation that has come face to face with the harsh realities of the fragility of employment even in so-called stable industries jump at the chance of 5% mortgages?
I find it unlikely. Young people are more savvy than they’re often given credit for and are acutely aware of their financial instability. I think many will hold out till they can afford a larger deposit to avoid taking such a financial risk.
What do Young People Need Instead?
Immediate policies for young people need to move away from home ownership. For those who have lost their jobs or lost substantial proportions of their income, home ownership is probably the last thing on their minds.
Firstly, young people needed targeted and effective support to find new jobs. The Kickstart scheme was a good start, but many small businesses have reported finding it hard to access and hire people. This needs to change. Businesses actively looking to employ people need to be supported immediately.
Debt support and relief also needs to be on the agenda.
Recent research from money.co.uk found 78 percent of UK adults started the new year in debt. This figure does not include mortgages, meaning just 22 percent don’t have some form of personal debt. Most concerningly, 35 percent attribute their debt to ‘normal living expenses’. People simply can’t afford to live the life they’re leading. Their income doesn’t cover their basic living expenses.
The government needs to address this growing problem to support young people. You can’t even consider home ownership until you’ve cleared your debts!
An increase in the minimum wage would also help. If salaries for low earners increased, more people would be able to afford life’s necessities. They might also then have some money left over to spend in shops or restaurants – further boosting economic recovery.
Young people also need some reassurance that the burden of repaying the deficit will be shared among generations and won’t just be added to our income taxes and the like going forward.
Millennials and Gen-Z are already concerned enough about their pensions and affording retirement, without significant tax increases making saving and preparing even harder than it already is.
Auto-enrolment into workplace pensions has had a huge benefit for many people, but this now needs to go further. Currently, my workplace pension says that if I pay in at my current rate until retirement, I’ll have a yearly income of £3,000. Clearly, this is not enough to live off. The government should incentive saving more to address this problem.
I could write a book about all the measures that could be introduced to support young people, but I think these are some of the most important.
What Happens Next?
Essentially, we wait. Rishi Sunak will address the House of Commons on Wednesday and – for the first time in Budget history – will then take questions from the press and the public.
Given Covid-19’s economic impact on young people has hardly been kept a secret, there is hope more targeted support will be provided for this age group. But, time will tell.
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