EXCLUSIVE: “A roof over our heads” – Yorkshire Building Society in ‘The Fintech Magazine’

A major report on the state of the housing market in the UK by Yorkshire Building Society points to the urgent need for new thinking and new technology solutions. Here, we look at the report in detail and some of the proptechs who are searching for answers

In 1874, the Building Societies Act electrified the growing mutual building society movement in Britain. A form of regional cooperative, these financial institutions focussed on enabling ordinary working people to buy their own homes for the first time – something unheard of until that point – thereby indelibly linking property ownership to social equity.Nearly 150 years later, are we turning the clock back? According to a new report from Yorkshire Building Society, we could be entering another era of the ‘haves’ and the ‘have-nots’ when it comes to housing.

Yorkshire Building Society, one of the UK’s largest, was established in the heat of Victorian social reform in 1864. But its Home Truths report suggests almost four-fifths (78 per cent) of first-time buyers and seven in 10 (73 per cent) remortgagers think homeownership is again becoming an elite privilege. In fact, two-thirds (61 per cent) of first-time buyers and over half (54 per cent) of remortgagers believe the UK could be a nation of renters within five years.And that poses a wider potential problem, given that three-fifths (58 per cent) of private landlords said they feel pushed out of the rental sector by the government.

Tougher regulation of the rental market and new tax regimes are making it harder to make property investment pay – 61 per cent feel that property ownership is becoming less attractive as an investment option. So, how has this happened?

The report, which canvassed the views of 500 first-time buyers, as well as 500 remortgagers and 500 landlords, identifies a perfect storm of spiralling property prices and a cost-of-living crisis, compounded by a return to more normal interest rate levels than a whole generation of borrowers have been used to.

The cumulative effect of this makes it harder and harder for would-be borrowers to meet the affordability criteria for a mortgage.Technology alone can’t address systemic issues in the economy, but it can facilitate new ways of assessing an individual’s creditworthiness and help lenders come up with a radically different approach to home ownership and renting that could help to rebalance the market – ultimately, to give everyone access to decent, affordable housing, just as the innovative social reformers did more than a century ago.

Social change is contributing to the need for urgency, the report argues, with factors including the green imperative and post-COVID hybrid working where ‘for many people, their home is not just their castle, it is also their office’.

Ben Merritt, Yorkshire Building Society’s director of mortgages explains that one of the problems is how few of today’s applicants fit the ‘vanilla’ model of a borrower, due to changing lifestyles and social dynamics. The industry needs to catch up with that trend, he says.

“The reality is that family structures are changing due to things like greater life expectancy prompting a rise in multi-generational living. More people are working for themselves, or employed as contractors, meaning they have unstructured incomes, while factors like the shift to hybrid working following the global pandemic are changing what they want from a home, and therefore their borrowing needs,” says Merritt.

A small but growing army of proptechs are finding their own ways to navigate this new paradigm, from rent-to-buy facilitators like Keyzy and Adjoin Homes, to new-model lenders like Molo Finance. Forward-thinking established players like Dutch bank ING are playing their part, too. The urgent need for innovation is clear from trends identified in the report, including the fact that the chief reason for first time buyers wanting to get onto the property ladder was to stop wasting money on rent (53 per cent). Those very high rental costs are themselves hampering their efforts to save a deposit – possibly galvanising demand for new rent-to-buy solutions. Almost all first-time buyers surveyed (94 per cent) were saving towards a deposit (averaging £32,000 or £44,100 in London), and expecting that to take them four-and-a-half years.

“84 per cent of remortgagers thinking of extending their term said they would consider paying into retirement”

Those who can, are seeking financial assistance from family – almost a third (29 per cent) from parents – while 64 per cent are buying with a partner rather than going it alone.

But, as the report points out, some of the steps they are taking could be storing up problems for the future, as three-fifths (58 per cent) of first time buyers are purchasing homes later due to economic volatility, and therefore looking to pay them off later in life, too.Remortgagers, meanwhile are facing a fixed-rate cliff as low-interest deals end, affecting an estimated 100,000 people every month. Seven in 10 (72 per cent) of them said they would consider extending their mortgage terms to reduce their monthly payments, and four-fifths (84 per cent) of these said that they would consider continuing to pay their debt into retirement, with an average age expectation for paying it off, of almost 70 (69.9 years). Going interest-only for a period (55 per cent) was an option for some – a potential ticking timebomb for those with no eventual repayment vehicle.

Other industry experts have highlighted similarly concerning trends, particularly around some of the choices older borrowers are having to make in order to manage their payments. PensionBee research from June showed that three-quarters (76 per cent) of mortgage holders over 55 were worried about rising interest rates; 62 per cent about managing their payments to the end of their term; and almost half (46 per cent) about how to eventually pay off their mortgages. Using a capital lump sum was the most common plan at 22 per cent, followed by using their pension, at 16 per cent.

PensionBee director of public affairs, Becky O’Connor, suggested increased mortgage rates could be causing an ‘abrupt rethink’ of retirement plans and worry among older homeowners still repaying loans. She warned that while tapping into pensions to pay off home loans with mortgage rates rising might be tempting, savers should consider the potential impact of using up tax-free cash early on in retirement and not having sufficient money to sustain them for the rest of their lives.

Creating financial tools to help people choose between being mortgage-free and having a better pension income would appear to be a clear gap in the market.

THE LANDLORD STORY

Landlords play a crucial role in the housing ecosystem and the Home Truths report shows they are facing their own financial challenges, putting a huge question mark over long-term housing availability for the most vulnerable. Research shows that private landlords are key to providing housing to couples with dependent children (34 per cent), single parent households (18 per cent), the low paid (nine per cent) and those with disabilities (four per cent) Only half (49 per cent) of landlords surveyed for the report had increased rent demands in the last 12 months; and by an average of 10.2 per cent, in line with Consumer Price Index inflation for the year to March 2023 (10.1 per cent). Two-thirds (66 per cent) said they intended to continue to rent out property for the next five years.

Almost two-fifths (38 per cent), though, said the government should do more to support the rental sector in light of changes to regulation and taxation, making it harder for them to operate profitably, by allowing them enough time to make required changes.The report concludes that ‘landlords feel under siege’ with legislative changes strengthening tenants’ rights and standards for properties adding to financial pressure.

And yet they will have a significant part to play in helping the market find ways forward.

A NEW HOPE

Providing perhaps a glimmer of optimism, research from HSBC bank in November suggests seven in 10 (68 per cent) UK first-time buyers are more confident about getting on the property ladder than they were at the start of the year. Its findings coincide with the Bank of England holding its base rate for two consecutive months and property market rates reflecting this with a downward trend.

In the wider economy, inflation, the key contributor to rising costs, also fell further than predicted in October, to 4.6 per cent – the largest single monthly drop since 1992.

“78 per cent of first-time buyers and 73 per cent of remortgagers think homeownership is again becoming an elite privilege”

Andrew Matson, head of mortgages at HSBC UK, said of the findings: “It’s encouraging to see more optimism amongst first-time buyers. The first half of this year has been challenging, but the shift in attitudes is reassuring and highlights the resilience of the housing market.”

Indeed, Yorkshire Building Society’s research shows that two-fifths (37 per cent) of first-time buyers are still aiming – and budgeting – to buy their own property within the next year. But the report concludes that while the aspiration to own comone’s own home remains strong, the majority of people fear it is out of reach. There is no silver bullet to the complex challenges facing home ownership in the UK in 2024, but technology can, and has the potential to do more, to reform it.As the report says:

“The mortgage and housing markets in the UK are undergoing profound change – the models and expectations that have dominated… are being challenged. Lenders will need to continue to think outside of the norms of traditional deposit, affordability and credit score constructs.”

PROPTECH : RENT-TO-BUY

ADJOIN HOMES

Adjoin Homes founders Marios Tsatsos and Kostas Zachariadis established the company in 2018, inspired by their own experience of the rent trap. Its rent-to-buy model offers a way out – and in – for landlords and tenants. Landlords sign over their property management to Adjoin and receive a rental increment of up to 20 per cent for a defined period, with a guaranteed eventual sale. Tenants, meanwhile, can choose one of three options to run alongside their tenancy agreement.

In line with Adjoin’s mission of helping renters ‘pour less money down the drain’, these allow them to ‘test drive’ a chosen property, with the chance to eventually buy and receive up to 40 per cent of any price appreciation, in return for the level of top-up rent (10, 15 or 20 per cent) they’ve chosen to pay.With demand increasing, Tsatsos says Adjoin hopes to make a serious impact, where ‘those aiming to become owners are able to achieve their tangible end goal through our platform: own the property they’re already living in’.

“We provide resources to help them save, coach them on what it takes to become a homeowner, and allow them to buy into the appreciation of the property before they own it, ensuring the market can’t leave them behind,” he explains.

In fact, Adjoin is playing its role in a wholesale shift in the UK concept of homeownership that dates back hundreds of years: “Every crisis invites and supports disrupting solutions. The dire straits of the present housing crisis might be hiding the opportunity for landlords and tenants alike,” he continues. “We cover the gap between renting and owning and have the financial and technological tools to make it happen.“

As touched on in the King’s Speech, we could be seeing a massive overhaul to the feudal age leasehold and freehold system… to simplify the way ownership works.

“We are also closely following developments in fractional ownership, wondering if it could become more mainstream, leading to a more liquid housing market. It could reduce barriers to entry, as smaller sums would be needed to become a homeowner. If backed by lenders and relevant legislation, this could make a large difference to the way property assets are viewed.”In the meantime, a generation of renters needs help and Adjoin is developing cutting-edge solutions to make its offering as seamless as possible.

“In collaboration with University College London, we have developed our own automated valuation model,” adds Zachariadis. “We are also developing scientific forecasting tools so that at every point, the tenant and the owner can know exactly how much their Adjoin wallet is worth.”

PROPTECH: KEY WORKERS

KEYZY

One of the gaps highlighted by the Yorkshire‘s respondents was financial education to help bamboozled first-time buyers and property owners navigate a path through today‘s market.That is central to the innovations underway at another rent-to-own fintech, Keyzy, seeking to get despairing would-be owners back on track.

“Education is a key part of the problem and an area of opportunity,“ says co-founder Simon Groll. “Many renters who lost hope of becoming homeowners have developed habits that reduce their future chances. The first part of re-education is showing that there are viable alternatives, like Keyzy.

“We work with residents to ensure they are in a position to buy a home by helping to build up a deposit, improve their credit score and adopt better financial behaviours, to qualify for a mortgage in future.”Understanding that even applying for a home can be daunting, Keyzy is making that as straightforward as possible, too, using ecommerce-style approaches. “We’ve designed our homeownership application based on the best ecommerce websites,“ continues Groll.

“Secure identity and income verification technology makes it easier for prospective homebuyers to apply, often in less than 10 minutes compared to the hours of paperwork and manual document checks some mortgage lenders require.

“We’ll also soon be launching a new coaching tool to help all prospective homebuyers understand what it takes to get onto the property ladder.“With finding a sizable deposit among the key issues in these days of high house prices, compounded by high rents making it harder to save, Keyzy offers zero-deposit, rent-to-buy packages for young professionals, key workers and other first-time buyers. Anyone with a minimum income of £30,000 can complete an application and ID verification with a selfie and scan of their driver’s licence or passport, verify their income and expenditure using open banking then start looking for homes within their budget.

Keyzy promises immediate call scheduling with an agent, a budget in 90 seconds and the potential to complete a full application within 20 minutes to ‘create a better path to homeownership’, stating it is ‘here to help those who keep the country running: healthcare professionals, nursing and social care, teachers and others in education, firefighters, police and prisons, and government services‘.Once a would-be buyer finds a house they want, Keyzy negotiates a price for them and they simply move in, renting until they’re ready to buy, knowing 25 per cent of their rental payments are going towards reducing the eventual purchase price when they are ready.

For landlords, Keyzy combines a rental premium with a guaranteed sale at a fixed price lined up within three years – to ‘help landlords future-proof their properties, secure their financial futures, maximise their rental income and reduce their maintenance costs’.

This article was published in The Fintech Magazine Issue 30, Page 80-81