The insanity of our mortgage market

Thanks to a housing market boom and strict lending practices we live in a world where you need to save up at least 10% of the value of your dream home before you can even begin to think about putting in an offer and clambering onto the housing market.

With the average house price now £189,388 that means you'll need to have amassed a savings pot worth at least £19,000 – or £51,000 in London where the average house price is an incredible £514,000 – in order to get a mortgage.

As a result first time buyers are getting older and older – you'll be 36 before you can call yourself a homeowner these days.

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But now a new hurdle has been set in front of first time buyers. Saved up all that cash? Got a good job? Ready to buy a house? So far, so good. Oh wait it took you until you were over 40 to manage all that, then, nope, you're too old to get a house.

When is the right time to buy?

In the increasingly crazy world of mortgage lending people are now getting turned down for a mortgage because they are too old, when they're still only in their early 40s, or even late 30s.

This is because since the Mortgage Market Review (MMR) came into force in the spring mortgage lenders are focussing on affordability when they decide how much money they will lend to people. You have to be able to prove you can afford to repay your mortgage.

The calculations used to work out affordability are the most incredibly cautious sums the banks have ever used. You have to be able to afford the mortgage now, and prove that if interest rates rose to around 6% you could still afford it. Given most people switch mortgages every couple of years, it's probably fair to say that stress testing to 6% is excessive.

Your bank also looks at everything else you have going on in your life and deducts those costs too, even things that you might not have even thought about yet like the arrival of babies during the mortgage term.

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They also fail to take into account the fact most of us would prioritise repaying our mortgage over most other outgoings – so if interest rates rose you'd cancel your gym membership, go on fewer holidays and eat out less often before you missed a mortgage repayment.

As a result of all these affordability calculations people are looking for ways to bring down the monthly cost of their mortgage. The smaller it is the more likely you are to pass the affordability tests. One popular way to do this is to go for a longer mortgage term – choosing to repay your debt over 30 or even 35 years rather than the typical 25-year-term.

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This should thrill the banks, by lengthening the time it will take to repay your debt you end up coughing up a whole heap more in interest, and the bank doesn't really have to worry about how you'll repay that debt for the next three and a half decades as it is incredibly unlikely you'll stick with the same mortgage deal for the whole term.

In all likelihood you'll switch mortgages a couple of years down the line once the introductory rate has ended.

This happened to me. I had a 35-year mortgage where I repaid close to a thousand pounds every month then, after two years, switched mortgages and repaid the old lender almost as much as I borrowed in the first place.

My monthly payment had been almost entirely interest.

Cash cows for lenders

Long mortgage terms are cash cows for the lenders and help first time buyers struggle onto the housing ladder. But, the new MMR rules mean most people can't get a long term deal, and, in some cases, they can't get a mortgage at all.

That's because most banks won't let a mortgage term continue beyond the point at which you retire. So, if you are 40 you would be 75 by the time you repay your mortgage under a 35-year-term and the banks can't allow that. If you are 45 you won't even be able to get a 25-year mortgage in many cases.

The mortgage and house buying markets are utterly insane at the moment. After the crazy lending of the noughties the regulatory bodies have gone completely over the top when it comes to tightening up lending practices.

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You've heard the expression shutting the stable door after the horse has bolted but with MMR the stable door has been slammed shut, bolted, padlocked and welded shut.

Home buyers are getting older and mortgage lenders need to respond to this. Most people in their 30s and 40s are well aware that what with state pension age rising and increasing life expectancy they are not going to retire at 65 and many will probably still be working at 70. So, banks need to be prepared to lend to people until they are older.

The incredibly harsh affordability criteria set down by MMR also needs to be looked at. If you make it almost impossible for normal people to buy a house, the housing market is going to stall.

If things continue as they are we are going to live in a country where the bulk of property is owned by the older generations who bought when the banks would lend and are now building buy-to-let empires.

Younger generations are going to be left waiting for elderly relatives to die before they stand a chance of owning a home.

What do you think? Are the young being blocked from the market? Are the lending criteria too strict? Or do we need such strict rules in order to dampen demand and bring down prices?

Read more on mortgages on AOL Money

What are buy to let mortgages?

Older borrowers struggle to get mortgages

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