Feature: Lockdown savings only help a few

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The pandemic has led to a savings boom, but many mortgage experts suggest that because the wealthiest households are the main beneficiaries, it is unlikely to help many more first-time buyers access finance. real estate scale.

Numerous studies have shown that households have set aside over £ 100bn in excess deposits as restrictions have made spending difficult. Data from the Bank of England (BoE) may be the best indicator, given that the Bank has access to actual balances. It shows that between March and November 2020, consumers racked up more than £ 125 billion in more than a normal year, and balances are expected to increase significantly in the first half of 2021.

However, dig deeper and it becomes clear that the less affluent parts of society, including aspiring first-time buyers (FTBs) as well as the truly vulnerable, do not share this accumulation of wealth.

Research by the Building Societies Association (BSA) in March showed that 47% of those earning more than £ 30,000 a year had put money aside during the pandemic, compared to 29% of those earning less. This reflects the BoE’s research in November.

Soaring savings

While the richer households that have kept their income may have invested some excess money in bricks and mortar, many experts say that increasing savings is unlikely to increase the number of owners.

Sarah Coles, personal finance analyst for Hargreaves Lansdown, said: “More households have savings than before the pandemic, but those who work full time and people who own a home are much more likely to fall into this bracket. . Those who rent are more likely to have used up their savings to pay for it.

Nationwide Building Society chief economist Robert Gardner said: “The increase in savings has been concentrated among older and richer households.”

While FTBs are therefore less likely to have been able to increase their deposits, Gardner says the savings boom may still help some newbies as the pandemic may have increased Mum and Dad’s bank coffers.

He adds: “The fact that about a third of FTBs in England in 2018/19 said friends or family helped them raise a deposit suggests that the recent increase in savings will help some, but also that the impact will not spread. uniformly.”

One of the issues young people face throughout the pandemic has been their lack of job security compared to others. Data from the Office for National Statistics shows that those under 25 account for more than half of job losses during shutdowns. Naturally, this will limit their ability to build up a real estate deposit.

Rising price

Even though potential FTBs have managed to secure a larger deposit, they face the additional challenge of rising house prices given the market surge since mid-2020.

The Halifax Home Price Index shows that in the year to March, the average UK house price rose 6.5% to a record high of 254,606 £. Much of the increase was attributed to the additional demand created by the stamp duty holiday, and interest could rise further with the greater availability of mortgages for those with a 5% down payment.

London & Country Director David Hollingworth says: “Some FTBs will have been able to accelerate their savings.

“Having said that, the high demand and the lack of supply meant that prices did not move in their favor.”

Whatever the types of borrowers, the experts to whom Mortgage strategy talked about have yet to see increased wealth in savings translate into borrowers providing larger down payments.

Cherry Mortgage & Finance Director Matthew Fleming-Duffy said, “We are not seeing a marked increase in deposits available to our customers.”

However, those who were successful in saving during the pandemic are likely to be in better financial shape, which could make them more attractive to lenders in the future.

It is also suggested that those who have accumulated more money have paid off more of their mortgage, which can boost household finances.

Analysis of government data by the Equity Release Council (ERC) shows that £ 5.1bn of lump sum overpayments were made in the last quarter (Q4) of 2020, up 18% year on year. However, like much of the economic fallout from Covid, there is another side of the story. Since many people have struggled financially, regular repayments were 2% lower in the fourth quarter of 2020 than they were a year earlier, according to the ERC.

Judging by the BoE’s outlook, those who have accumulated excess savings could spend a large chunk of it over the next few months as the restrictions are lifted, meaning balances could quickly drop. Many want to use the extra money for activities other than housing, such as travel and entertainment, so the excess money may never end up in the real estate chain.

In the BoE’s February Monetary Policy Report, the Bank said: “A large chunk of these savings has probably been accumulated by households who have not been able to spend as usual. As restrictions ease, they could make up a larger amount of their previously abandoned spending.

“Much of the larger than usual savings stock is in bank deposits, which households have historically tended to spend more on. As a result, the Monetary Policy Committee considers that the spending risks linked to the saving behavior of households are biased upwards. “

Some of that money can be used to buy a property, of course. Of those fortunate enough to have racked up additional savings, BSA research found that 12% wanted to spend that to buy a home. Much of the savings can also be spent on home improvements or repairs, which for some can negate the need to borrow on their home to raise money.

A search of comparison site Forbes Advisor in March found that, of those who put money aside this year, 23% said at least one reason for doing so was cosmetic home improvement. as a redecoration, while 16% indicated a home improvement and 12% cited garden improvements.

Additional loan

Hollingworth points out that while people have extra cash to undertake such projects, it does not necessarily mean that they can pay for all of them themselves; they may still have to borrow.

He says: “Any larger project may still require additional funding. Mortgage funds are available at exceptionally low rates, so I think there will always be a need for mortgages, even though the savings have helped build the confidence to move forward.

However, such borrowing can be done through a personal loan as it can be cheaper over time with terms tending to be much shorter than mortgages.

Regardless of what happens to the household cash surplus generated during the pandemic, the consensus is that it will widen the gap between the haves and have-nots – and therefore little disrupt the real estate market.

“The blockages have created terribly polarizing situations,” says Fleming-Duffy.

“For those who were able to work from home, it had a positive effect on their finances. However, for others, the negative consequences of blockages are still being felt. “

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