It is going to be a bumper year for the City, with a reported 16 per cent jump in bonus payments to a record £19bn, according to the Office of National Statistics (ONS). While some will blow the additional cash on foreign holidays, magnums of champagne and expensive trinkets, a huge proportion of this capital will find its way into the housing market. With this asset class outstripping the performance of equity markets, and house prices rising by almost 500 per cent since 1983 (source: Halifax House Price Index), it is no surprise that bricks and mortar is the number one investment.
Areas of growth
Many of these City bonuses will be used to purchase properties in the traditional house hunting grounds of Mayfair, Kensington & Chelsea and Knightsbridge, which is likely to result in the cost of these exclusive areas continuing to rise in value. Properties in the ‘villages’ of London, such as Wandsworth and West Hampstead, are also set to benefit from the ripple effect of this year’s City bonuses, attracting buyers looking for traditional properties in well-established locations.
For those who want something outside London, exclusive areas in the Home Counties such Cobham, Tunbridge Wells and Sevenoaks are becoming increasingly popular and price rises are expected in the most sought-after areas. Docklands has also seen a revival over the last few years and City workers who live and invest within close proximity of their jobs are snapping up exclusive apartments.
It is not simply London that is benefiting from this injection of cash as many in the Square Mile aspire to purchase foreign property. Traditional French Châteaus and gorgeous Spanish Villas are also on many peoples’ shopping lists, as are locations further afield such as property on the Palm and the World islands in the exclusive Jumeirah area in Dubai.
In fact, there has been so much interest in property as a potential ‘destination’ for bonus payments that many companies at The Property Investor Show, which will take place at the ExCel Centre in September, are going to be actively targeting these high net worth consumers.
But how are these wealthy individuals going to finance their property purchases? After all, it is only the very fortunate who are able to say that they can use their bonuses to purchase an exclusive property in Chelsea or Knightsbridge outright.
Attracting the ‘big fish’
These high net worth customers have a variety of options open as most lenders are actively working to offer products, which will attract these ‘big fish’. One option is a mortgage product that uses affordability models. If Joe Bloggs has been easily paying his £10,000 a month rent for five years now and has very few other outgoings, it seems a little churlish to tell him he can’t have a mortgage that will cost the equivalent – whatever his salary limitations. This innovative method of home finance is growing in popularity and it will be interesting to see if the market eventually moves from the traditional income multiples to this more realistic model.
Another option for consumers with bonuses is the use of fast-track mortgages, which are designed to allow lenders to process lower-risk applications faster by requesting reduced levels of documentation and supporting income evidence. However, these type of products do have their critics as some commentators feel that in order for the self-certification market to prosper these products should be avoided.
This leads us to one of the most popular options for financing a property purchase for those who work in the square mile – self-certification mortgages. Traditionally, these products were intended to help the self-employed whose income fluctuated and therefore found using more traditional mortgage products difficult. The more flexible nature of self-cert has lead to a certain amount of abuse, which was famously revealed in the 2003 BBC exposé.
However, this market has grown in respectability since this report was published and all those concerned are well aware of the need for absolute propriety when selling these products. This has seen the self-cert market grown in leaps and bounds and it is now estimated to be worth approximately £22 billion per annum.
Indeed, this market can hold the solution for many consumers who rely on bonuses for a significant part of their income. This trend towards relying on self-cert looks as though it may be set to grow in the future as more lenders launch into this market and increasingly innovative products are launched.
So where does this leave us? City bonuses will continue to fuel the high end of the market in certain parts of the UK and abroad. However, we need the products and innovation in order to make sure that this force in the market is allowed to prosper and grow. This will in turn benefit all consumers as the innovations we see eventually filter into the mainstream and become part of more simple mortgage products.
