For once, it looked like there was some good news in the headlines, when it was announced last month that mortgage interest rates were the lowest that they have ever been. However, the news was short-lived for first time buyers. Rachel Colgan looks at the situation and explains what is happening to the mortgage market.
According to the news, property experts were highlighting the next six months to be the best time in history to take out a mortgage. But this was not the case for first time buyers, as it was then revealed that mortgage interest rates are only becoming more affordable for buyers with more equity in their property and for those who have a 40% deposit. In fact, for buyers with a 5% deposit, most likely first timers, interest rates could be up to as much as 5%.
To fuel the fire, days later it was announced that mortgage lenders are reducing the amount that they are lending first time buyers. Santander, for example, has now reduced its lending to first time buyers from five times their salary to four and a half times. This means that, for a first time buyer who currently earns £40,000, instead of being able to borrow £200,000, they will now only be able to borrow £180,000.
It seems that banks and lenders are responding to new regulations set by the Bank of England, which restrict mortgage lenders providing more than 15% of new mortgages at high loan to income ratios. Last year, the Council of Mortgage Lenders reported that 9% of new loans acquired were based on four and a half times an income, or more, and that this figure was considerably higher in London at 19%.
Previously, as stipulated by the Financial Conduct Authority’s Mortgage Market Review – which came into force last April – mortgage lending was based on affordability, as opposed to just income, factoring in outgoings such as direct debits, childcare costs and other commitments. Now the Bank of England has stepped in and changed the criteria to be based on salary multiples, it means that prudent first time buyers with a lower salary may now be penalised.
Whilst there are no set figures in place, Mr Boulger advises the following guidelines on mortgage lenders and the amount they will currently offer to lend.
By the end of 2015, it will be harder for anyone to borrow any more than four and a half times their salary. Together with the high cost of mortgages available to them and increasing house prices, these changes will have a big knock-on effect for hopeful first timers.
In the meantime, it is still possible to borrow at a multiple of up to five times a salary, but, as Ray Boulger of broker John Charcol says, they may have to pay a ‘considerably higher rate.’
He said, “For the minority of first time buyers who want to borrow between four and a half and five times their income, this will often still be achievable – subject to the usual caveats – but from a smaller choice of lenders. As a result, those first time buyers who want to borrow over four and a half times their income may have to pay a slightly higher rate, but a good independent broker will be able to steer them in the right direction.”
By the end of the year, it is expected that lenders are likely to follow Santander’s lead and the four and a half times salary limit will apply. As lenders will not want to expose themselves to perceived riskier mortgage applications, by being the only provider left to offer a higher lending rate; the change is inevitable.
Desire to buy
With lenders set to follow in Santander’s footsteps, any hopeful first time buyers might be justified in feeling that homeownership is being pulled further from their reach.
Understanding the benefits of homeownership, first time buyers in the UK are now well aware of the advantages of paying their own mortgage. Only last month, research from the Halifax revealed that first time buyers will be, on average, £742 better off annually paying a mortgage as opposed to their landlords.
“Average home buying costs are significantly lower than average rental costs, providing first time buyers with a large financial saving, if they can get on the housing ladder,” said Craig McKinlay, Halifax mortgage director.
Instead of stumping up large monthly rents, which continue to rise as buy-to-let landlords take advantage of first timers’ misfortune, first time buyers want to invest in their own future and feel the benefit of capital appreciation.
So, with the desire to buy existing, but more restrictions coming into play to make this less likely to happen, first time buyers might find themselves in a quandary. It doesn’t take a genius to work out that a solid savings plan is going to be essential to homeownership. There are still some good deals to be had with a 10% deposit, advises Ray Boulger. He says: “On the plus side, for first time buyers the cost of some 90% loan to value mortgages has fallen even further than the rates for mortgages with a big deposit, although there is still a huge differential between the best 90% and 95% rates.”
Cutting back on luxuries like holidays, the latest fashions or even avoiding a night out drinking expensive cocktails, will mean that aspiring homeowners will be helping themselves make valuable savings to put towards paying a bigger deposit for a property. Housing charity Shelter reports that it could take a family 12 years to save for a deposit, so those still child free and enjoying a double income, should make the most of this precious saving time.
Whilst a savings plan is all well and good, a 10-year stint cutting out luxuries may seem a little unappealing for most young homebuyers and so, looking to borrow money from family members should be considered. A staggering two thirds of first timers say they could not afford to buy their first property without turning to the ‘Bank of Mum and Dad’. On average, parental support contributes £13,281 towards a deposit for a house, according to Lloyds bank. Any amount that can be borrowed now, in order to reduce the years in rented property, will be savings made later on. Parental support can also help in the form of a mortgage guarantor, with many mortgages specially designed to allow parents to use their own property as collateral.
Those who don’t have access to parental support may also wish to consider using one of the many house purchasing schemes available in the market. One such scheme that helps reduce deposit requirements, as well as providing access to some of the most affordable mortgage rates on the market, is Help to Buy. Available in varying forms and with both newbuilds and secondhand homes, the government-backed scheme is a proving a very popular one and, last month, announced nearly 42,000 purchasers of the scheme; 83% of these being first time buyers. With the newbuild aspect of Help to Buy, it is possible that only a 5% deposit is required along with access to 75% loan to value mortgage rates.
Lastly, by ensuring that all bills are paid and credit history is clean, first time buyers will be able to improve their chances of borrowing, whatever the rate of lending is.