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Owning a home has become an essential ambition for most British people. As of March 2011, 64 percent of homes in the UK were owned, while the remaining were rented. However, this was not the case always. In 1918, only 23 percent of the UK population owned a home. Mortgages have played a big role in the shift towards more people now owning homes. In this mortgage guide, we look at the history of mortgages in the UK in detail.

Early History of Mortgages

The word mortgage is made from two Latin words, mort and gage. Mort means 'death' and gage means a kind of a 'pledge.' In other words, a mortgage means a dead pledge. This meaning is interpreted in different ways. One interpretation is, if a borrower failed to repay the debt or fulfil the pledge, the property was dead to him. Another meaning is that the pledge was dead once the borrower repaid the full loan amount.

There are no historical records of the first mortgage. However, it is believed that mortgages were available in England even in the 12th century. In the year 1190, the English common law had a law related to mortgages. This law provided protection to the lender by giving him a share of the borrower's property. Even though the title of the property was held by the borrower, the lender could sell the property if he wanted to recover the debt.

According to the Oxford History of the Laws of England, during the Tudor period (1485 to 1683), a mortgage was defined as an ownership right, subject to the repayment of debt. The lender provided a loan to the borrower and set a condition that if the borrower fails to repay the loan, the lender will seize the property.

While it sounds very simple, the mortgage agreements back then had several complex clauses. Typical complexities revolved around the death of the borrower or the lender. For example, if a borrower died before the loan term, his heir became the owner of the property and had to take over the responsibility of repayments. However, if there were no fixed loan term, the lender would repossess the land if the borrower died. In the event of the death of the lender prior to the agreed payment date, the lender's heir will inherit the property. In both events, dower and feudal issues were very common. Overtime these disputes were minimized with increased litigation and protection for both mortgage lender and mortgage borrower.

The University of Nottingham has the record of a 500-year mortgage deed signed in the 17th century. This deed will give you some idea of the complexity of mortgage agreements in those times.

If the lender wanted his money back, but the borrower could not repay, the mortgage would be purchased by another borrower. The third-party borrower will now become the lender for the original borrower and will charge higher interest. There's an example of a mortgage related to the Manor of Cawkwell, Leicestershire. This mortgage changed hands seven times over a period of 34 years.

While this is only one incident in the long history of mortgages, this gives you an idea of how mortgages came into existence. It's because of these complexities that mortgages were not very common until the latter part of the 19th century.


Post World War I - The rise of social housing

Between the end of World War I (1914 to 1918) and the early 1970s, Victorian slums were a major concern for all governments. These slums were overcrowded and were, sadly, a common feature of a lot of British cities. One of the reasons behind these slums was the industrial revolution. The rapid growth in population and fast urbanisation were other factors behind these slums.

Because of the high price of land and property, a large number of people living in these slums could not move out of these overcrowded cities. The slums didn't even have basic amenities and posed a serious risk to the health of the inhabitants. Most of the houses in the slums were rented.

The British government thought of solving this problem through social housing. One solution was to build huge social housing estates with the local authority serving as a landlord, and people paying rent to this landlord. However, it was not going to be easy to build the required number of houses because the funds and materials were always constrained.

The first major government intervention in social housing was not seen until early 1920s. In the year 1919, the Liberal government launched a 'Homes-fit-for-Heroes' concept. As the name suggests, the government built houses and provided them for rent to 'heroes' or soldiers who fought for the country.

During the World War II (1939-1945), there was a major slowdown in housing activity for six years, because the government's financial resources were channelized towards the war. The houses, which were built by the government, started becoming unliveable because there was no money for repairs and maintenance of the property. Not only that, enemy bombing caused damages to a lot of other houses. At the end of the war, the government was left with the task of rebuilding many more houses than before.

After World War II, the labour government made some more attempts towards social housing. However, all these attempts faced a lot of hurdles because the costs were increasing, and materials were not enough. The 1947 economic crisis made things worse.

However, the 1950s saw a dramatic resurgence in clearance of slums and building replacements. Towards the end of 1950s, the Conservatives were able to build many houses, both in the private and public sector. Along with building homes, during the 1950's and 60's, more and more people were encouraged to own homes as part of the Conservative's theme of creating a democracy of property owners. The government reduced stamp duty and provided loans to building societies. The 1951 Conservative manifesto mentions that after defence, housing was the second most important priority of the government. They had set a target of building 300,000 houses. The manifesto also talked about giving more freedom to the private builder, while ensuring the number of houses and flats built for renting didn't reduce.

When the Conservatives were elected to power in 1951, only 29% of UK people owned homes. They lost power in 1964, by when 45% of homes were privately owned. During this time, real income had grown considerably, and the economy had witnessed non-stop economic growth. There was also full employment. It's no surprise that there was a big increase in home ownership during this period. As classical history demonstrates, most people were quite affluent during that period.

However, the 70's saw a decline in the economy as the post-war optimism faded away. This led to a rapid increase in housing prices. The conservatives were again in power between 1971 and 1974. Even during this time, the Tories pushed for more and more home ownership deals.

In 1977, the Labour Government made a change to the Housing (Homeless Persons) Act. With this change, social housing was no longer going to be available for the population as a general provision. Houses were allotted only those in real need. So the families who lost access to social housing had two choices - either to buy or to rent. During these times and up until the late 1980s, the majority of people could not afford to own a home.

The Thatcher Era: Growth in private ownership of homes

This period was important in the history of mortgages. Home ownership had a further boost in the form of two policies announced by Margaret Thatcher in 1983. Under the first policy, which was named Mortgage Interest Relief at Source (MIRAS), interest relief was available for the first £30,000 of an eligible mortgage. The second policy was the announcement of Right to Buy scheme. Both these schemes were a part of the broader privatisation movement, in lines with the principles of Margaret Thatcher.

The Right to Buy scheme meant that anybody who lived in a council property could buy the property at up to 60% discount from the purchase price of the property. The discounted prices lowered monthly mortgage repayments meaning that many people paid the same or less thatn the rent paid on their council property. This led to an increase in the number of homeowners. More than 2 million people bought their council homes as a result of the Right to Buy scheme. In 1991, 67% of the population owned homes as opposed to 54 percent in 1981.

It was during this period that the mortgage market in the UK went through a major transformation. The 1980's saw the opening up of the UK capital markets and the lifting of exchange controls. As such many new mortgage lenders, including several mortgage lenders from the US, came into the UK market. Previously, people had to wait in a queue for mortgages, but now with the increased availability of capital they were being chased by lenders. The increased competition resulted in a benefit to the borrowers, as they now had more mortgage options, such as fixed and capped rate mortgages, whereas earlier they only had the option of SVR mortgages. Also, borrowers could now get mortgages worth many more times their salaries as competition provided far more mortgage products resulting in a borrowers market.

Borrowers also benefited because of the reduced dominance of building societies in the mortgages market. Until 1977, building societies owned 96% of the mortgage market, and the remaining 3% was held by banks and other institutions. However, by 1987, the share of building societies in the mortgage market declined to 66% and the share of banks and other institutions increased to 36%. Earlier, the Building Societies Association worked as a cartel, and almost all lenders charged the same rate, which meant poor choice for the borrowers.

Until the middle of 1980s, remortgaging was not an option, because there was no difference in the rates charged by different lenders, and so there was no question of switching a lender to get a better rate.

Early 1990's: Recession and rising mortgage debts

As it turned out, the boom in mortgages was not backed by adequate regulation. This meant that a lot of high-risk borrowers were able to get mortgages. The easy availability of funds led to a rise in demand, which in turn caused housing prices to increase.

However, the recession in the early 1990s saw a crash in housing prices. As a result, many people were left with debts that were more than the price of their homes, this is known as negative equity. The economic slowdown meant that a lot of the high-risk borrowers could not pay their mortgage repayments. The issue was compounded as homeowners found they were unable to sell their homes because there were no buyers. This led to an increase in home repossessions. The five years between 1990 and 1995 saw a repossession of around 300,000 homes.

The 90's and the early 2000 period taught a big lesson to the government and the lenders. They realized while a competitive mortgage market is needed, the market must be regulated properly, and borrower's risks should be assessed carefully before lending.

Post 2007: New mortgage lending rules

By 2007, it became clear that the mortgage market had resulted in a lot of trouble for many people. This caused the government to review the mortgage market and identify what changes were needed in the market to avoid previous hardships faced consumers. The Mortgage Market Review (MMR) started as a discussion paper in 2009 and became a full-fledged policy statement and a final set of rules in 2012. Based on the MMR, a variety of changes in the mortgage market have come into effect from 26 April 2014.

Of the several changes announced in the MMR, the key factor is that mortgage lenders are now made more responsible for assessing the affordability of consumers. Earlier, lenders provided mortgages simply on the basis of a borrower's income. However, mortgage lenders must now also check the spending patterns of borrowers, and whether they can afford to repay the loan.

The new rules have caused a slowdown in mortgage activity. In November, 2014 the number of approved mortgages stood at 59,029, a 17-month low or the lowest since June 2013.

Since late 2013 housing prices have continued to increase as a result of increasing demand due to the rising population, fuelled by an increase in birth, survival rates and aging population coupled with high net rates of migration (both controlled migration from outside the EU and uncontrolled migration from within the EU).

In the 2015 Budget, George Osborne, Chancellor of the Exchequer, announced significant changes to the tax relief system for private landlords. The change in tax legislation was introduced to deter Private Landlords and reduce the number of private landlords with multiple properties. The growth in private landlords led to a reduction in available properties for first time buyers and those looking to move home. The new tax legislation meant private landlords saw their tax relief received on mortgage interest payments gradually phased out, the rate of relief changes applied from 100% to 0% over a 4 years period. Phased in at 25% increments the tax legislation is expected to significantly reduce the number of private landlords by 2021 as well as generating significant income for the treasury.

In modern times, first time buyers find themselves having to save for deposits running into the tens of thousands of pounds with the average age of the first time increasing year on year. In 2016 the average age of a First Time buyer was 35 with most people with aspirations of owning their home believing that it wouldn't happen until they were between 36 and 50 years of age.

In recent times the UK government has introduced a number of incentives to encourage the building of new homes and support first time buyers. Whilst this has supported a few moving into homes, it has also underpinned the continued increase in house prices making purchasing a home for the first time more of a dream than a reality for most working families.

A key challenge for the UK government in modern times is controlling the price of houses to avoid a repeat of the crash of the nineties. This can only be achieved by reducing demand either by:

  1. Building more houses than are required (a surplus will always be needed to allow for unplanned population events.
  2. Reducing the size of the UK population. Not easily achieved, perhaps we need to build an island in the Caribbean somewhere to allow our pensioners to retire in the sun and free their homes for future generations.

Whatever the solution is, it does need to come within the next 10 years. The increasing demand for homes currently affects both homebuyers and those who rent privately. Council houses are now the luxury of the few with many forced to rent privately, this has increased the demand for rental properties, as a result rental prices have increased to all time highs. The challenge for the UK government and those looking to rent or buy their own homes is becoming as great as that faced post world war 1.

Summary

The mortgage market in the UK has evolved over its long history. Borrowers of mortgages in the UK have seen it all, right from complex mortgage agreements to the opening up of the mortgage market. They have also seen the recent changes where lenders have introduced stringent criteria before awarding new mortgages. Nevertheless, for years, mortgages have helped several aspiring homeowners get their dream home. Higher demand for properties in modern times has resulted in a housing crises which affect property purchases and rentals. Historically the UK has resolved these issues and no doubt, a solution will be forthcoming for our current challenges though no doubt not fast enough for those who live with the challenge each and every day.

If you have a mortgage or are planning to take one, use our mortgage calculator to calculate your mortgage repayments or one of our many mortgage calculators designed to support you with everything from savings for a mortgage deposit to comparing mortgage deals.