Newcastle Building Society has become the latest lender to look at ways of helping first-time buyers take their first step on the property ladder, with the introduction of a new guarantor mortgage designed to take away the income multiple burden from many prospective homeowners.
As the average house price now lingers around the £100,000 mark on the Halifax property survey, first-time buyers need as much help as possible to get on to the first rung of the ladder, especially in London where £100,000 will just about buy a one bedroom flat.
The Guarantor Mortgage allows a third party to guarantee any shortfall between the amount a borrower may be offered from a lender and the cost of the property they wish to buy. If a young professional can borrow £60,000 and the property they want to buy is £100,000, their parents could guarantee the outstanding £40,000.
Robert Hollinshead, chief executive at Newcastle BS, said: ‘Getting on to the first rung of the property ladder is very difficult, not only in the South East, as you would expect, but also in regions such as North Yorkshire and Warwickshire. With the Guarantor mortgage we give families of young professionals a helping hand by guaranteeing the excess loan amount. The majority of young professionals achieve significant salary increases in the first five years of their careers, so in many cases the guarantor will not be needed beyond the first few years.’
The Newcastle product offers LTV to 100%, no MIG, and daily interest calculations. However, it does come with a hefty redemption penalty of 5% if redeemed in the first five years.
Newcastle is one of many lenders targeting the first-time buyer market. There has been a spate of lenders offering products specifically designed for the first-time buyer.
Woolwich recently launched its Open Plan flexible mortgage targeting first-time buyers. It has no MIG, a 1.4% discount for three years, no application fee and 95% LTV. Woolwich also offers the Open Plan Offset Mortgage, which enables first-time buyers to offset their mortgage against the savings of a third party ‘ such as their parents or another family member.
Bradford & Bingley, meanwhile, launched its ‘Rent a Room’ mortgage which enables borrowers to exceed the standard income multiples set by lenders by taking into account income generated from taking in a lodger. By including rental income, a borrower earning £15,000 could borrow an extra £13,812, by adding a tax-free £4,250 to an income multiple to 3.25, assuming a 5% deposit and repayment over 25 years.
A host of lenders now offer four times salary instead of the standard 3.25 for sole borrowers such as NatWest, Royal Bank of Scotland and Intelligent Finance.
David Connolly, product development manager at Mortgage Express, said first-time buyers have a number of products available to them depending on their needs.
Mortgage Express offers a range of products designed for first-time buyers, all MIG-free with income multiples of 3.25 times the first income plus one times the second or 2.75 times the joint income. One of its products even allows first-time buyers without a deposit to borrow 102% the property value.
As some lenders continue to increase income multiples, others such as NatWest and Alliance & Leicester are taking a more cautious approach.
Both lenders have reduced their maximum LTV in certain areas in a bid to protect borrowers from exceeding their limits in the eventuality of a house price collapse. The move aroused media interest and was condemned by some lenders as discriminating against certain postcodes. However, NatWest said the limits would only affect areas where there has been a disproportionate increase in house prices.
Andy Homer, spokesperson at Alliance & Leicester, said: ‘The decision provides customers with extra financial security should house prices fall. It has been suggested that our action could impact property values. There is no foundation for this as we are just one lender among over 100 in a very competitive market.’
Rob Clifford, managing director at Mortgageforce, believes postcode discrimination could cause problems when advisers promote mortgage deals.
He said: ‘When promoting a lender to your client base, through a mail shot, for example, you do not want to have to add small print saying that certain postcodes will not be eligible ‘ it is not what clients want to hear.’
This begs the question: are other lenders taking too much risk?
Rod Murdison, proprietor of IFA Murdison & Browning, does not think so.
He said: ‘There is an urban myth lenders are lending six and seven times the income multiple. Normally with anyone lending higher than 3.5 times income, there is usually some form of additional search done as evidence the person can afford to repay the loan.’
Taking into account affordability is a more sensible approach according to Murdison, who believes a previous history of paying rent should be looked at when assessing how much a first-time buyer can afford to borrow.
He said: ‘You do not have income multiple checks on people renting and someone could be paying more in rent than they would with their mortgage.’
However, Emma Keens, spokesperson at the Woolwich, said first-time buyers should shop around before choosing the right property and the right loan to ensure they can afford it.`
‘Affordability is the most important part. If interest rates increase borrowers need to be certain they can still afford the property. Borrowers need to look at the long-term implications ‘ not just the cheap rate,’ she said.