Cash makes up 42% of funding for buying homes - should we worry?

Cash is becoming an increasingly large proportion of the funding used to buy homes according to a new analysis of transactions and mortgage lending.

The figures show the total value of residential house purchases in the UK reached £261 billion in 2016 with £152 billion provided by mortgage finance and £109 billion made up of cash funds including the proceeds of existing property sales.

The Intermediary Mortgage Lenders Association says cash provided 41.8 per cent of funds for residential purchases -  £418 in every £1,000. This was up from 37.7 per cent in 2013.

It means that while 2016 house purchase lending was up five per cent overall from 2015 and up 32 per cent since 2013, the total sum of cash injected into residential property rose significantly faster - the sum has risen by 57 per cent in three years.

The trend comes despite government first-time buyer initiatives in recent years such as the Help to Buy schemes which have helped borrowers with deposits as small as five per cent to buy their own homes.

“The growing influence of cash in the house purchase market has potentially negative implications for aspiring homeowners and home-movers who cannot stump up enough funds to add to a mortgage which their salary can support in order to afford a property purchase” warns IMLA.

“The backdrop of a ‘broken’ housing market is putting growing pressure on lenders to innovate in terms of product design at a time when they have been operating within increasingly tightening regulatory boundaries” says Peter Williams, IMLA executive director.

“We are seeing a number of flexible products come to market to help make home-buying more accessible, for example using family guarantors, but there are limits to which flexible lending solutions can compensate for continuing structural flaws in the housing market with all the social implications that entails” he warns.

He says within that context, there is “a legitimate case for asking whether current restrictions on lending are still appropriate or have become over-zealous.”

In the meantime, Williams suggests, rising house prices and stagnant incomes mean that access to wealth as well as mortgage finance will increasingly separate the ‘haves’ from the ‘have nots’ in the property market if the importance of cash continues to grow.

“For all the focus on the UK’s international standing, Brexit mustn’t blind the next government from problems brewing on its own doorstep which will drive an increasingly bigger wedge between different elements of society and block those without family financiers from having access to home ownership” he concludes.