Passing the baton

Change is good. Continuity is sometimes better.?Britain has some endemic challenges that will survive the change of government. Come Monday morning, people will still find their monthly rent is expensive. Likewise, august institutions holding retirement savings will remain obligated to provide monthly income to an older generation. Our new Chancellor should emulate her predecessor and continue to promote the repatriation of pension money.?

There are many shovel-ready projects right here at home?

The crisis of housing affordability, and the dearth of stable income generating assets, mirror each other. Solving each in isolation, at scale, is hard. Addressing both simultaneously is possible.

Just think about it. In times past, companies offered loyal employees pensions that gave them two thirds of final salary, indexed to inflation, for life.?This "gold standard" employee benefit is widely considered far too generous for parsimonious employers.?But is it? Really??Many junior employees pay a third of their salary in rent, rising with the cost of living, for decades.

Here's a thought: The incoming ministers for Housing and Education could join the Chancellor.?The three Ministers might spend a moment thinking about that equation. Two thirds of final salary? One third of income?? In the context of the Mansion House Reforms, this is a scalable project – tackling two intractable challenges – that needs no taxpayer support. It needs clarity of thought and speed of execution, two things our new leaders are mandated to provide.

Most renters have no savings. There is no evidence that deposits play any measurable role in protecting mortgage banks from loss. There are nine million mortgage loans outstanding.?Repossessions are running at about nine a day. Trying to drive this statistic to zero by making home ownership difficult is wrong. It costs millions of renters hundreds of thousands of pounds each in retirement. If we don't tackle this problem, these people will need a lot of taxpayer support. If you pay rent at ￡1,000 a month for the 250 months you live in retirement, you’re out a quarter of a million pounds.?The maths are hard to refute.

Here's the next fact hiding in plain sight. Mortgage banks are not allowed to lend more than 4.5 times income. There are rare exceptions, but the average is 3.4x.? Meanwhile, renters occupy properties worth considerably more than 4.5x income. There are rare exceptions, but the average is 9.0x.?

Since rental yields dwarf mortgage rates (the word “exceeds” doesn’t do it justice) there is no evidence that people can’t afford to buy homes worth more than banks are allowed to lend. But here's the rub.

FinTech innovation required: The borrower's ability?to repay will gyrate chaotically for as long as two things remain true. First, banks offer short term mortgages that revert to punitive?variable rates. Meanwhile, the Bank of England manipulates short term interest rates as its primary monetary?policy tool.

Fighting inflation?is good. Wildly fluctuating mortgage repayments are bad

These are not academic observations. We've lived through this social experiment in the last three years. The sharp rise in mortgage repayments when borrowers roll off low short term fixed rates has played a meaningful role in this week's election. There are better ways to go about it. Plenty of people outside Britain?pay long term fixed rates. Problem solved. Changing mortgage products (that's the innovative bit) by removing loan to income caps can happen without legislation and at no cost to the taxpayer.

A modest proposal: Our new government can sponsor the emergence of a new class of home purchase plan for people who are well able to pay rent and who need to buy homes comparable to those they already occupy. But what do we mean by comparable? Well, there are profound differences in rental yields up and down the country. The solution that emerges will need to respect local circumstances. It takes a little maths and quite a bit of data to define "comparable" but we're British. Financial innovation is kind of our thing. So let's look at the problem in more detail.

Identical new build homes, rented by people with identical salaries, have different market values in different parts of the country. A paediatric nurse who prefers to move from Birmingham to Brighton will pay higher rents but lower rental yields in that popular coastal town. Landlords take these differences in their stride. Not so banks. Mortgage rates will remain the same in both towns. Ergo, essential workers are priced out of ownership in places where we may need them the most. We can innovate our way out of these challenges with locally-relevant repayment terms.

We’re a nation with nineteen million households paying monthly income to either a mortgage bank or a landlord.? There is no evidence that helping renters become owners will increase the combined incidence of quotidian calamity that banks and other conservative investors fear. Death, divorce, destitution, incarceration, inebriation, intoxication, repatriation, relocation and refinancing.?There are many reasons why deep-pocketed investors see risk when you look at cashflow streams, family by family, in forensic detail.

Stand back for a minute and the forest reveals itself. Those stuck renting at the point of retirement usually earn less than their home owning neighbours. Pools of pension savings are larger than the deposit base of all the mortgage banks combined and these institutions are looking for new projects to support. If deposits and loan to income caps impede home ownership with negative consequences for real people, retirement institutions have a role to play to address these problems at scale.

To his credit, the outgoing Chancellor’s Mansion House Reforms recognise this fact.?As a nation, we can afford to help each other. Some of our largest financial institutions have made public commitments to use their muscle to help solve problems.?That's a step in the right direction.

More steps are needed. I urge our new leaders to keep this initiative on track. With no call on the public purse, no legislation, no impact on the public sector borrowing requirement, and within the life of this parliament, we at Pathway can help implement the following intergenerational transfer of wealth:

Let’s build a platform where younger people can pool their rent, in exchange for ownership, while older people (intermediated by retirement institutions) fund these homes, in exchange for income from the pool

Innovative, but not complicated. Come on people. We can do it.

?#fintechinnovation begins at home

Ike Udechuku | Cofounder | CEO | The Pathway Club