Judging by some of the headlines in the national newspapers recently, you could be forgiven for thinking it is all doom and gloom for today’s first-time buyer.
Like most headlines, there is more than one side to the story. Yes ‘ we have experienced record property price growth in recent years and the average price of a UK property now stands at five times the national average salary. While there is no doubt that low earners have been hit the hardest, a silver lining ‘ in the form of tailored innovative mortgage products specifically designed to cater for the needs of the first-time buyer ‘ has emerged.
Recent mortgage products, such as Scottish Widows’ professional scheme, Newcastle Building Society’s guarantor mortgage and the new rent-a-room mortgage available via The MarketPlace at Bradford & Bingley, have created new ways onto the property ladder for many first-time buyers. The informed broker can easily paint a more balanced picture of the fortunes of the first-time buyer and it is clear that good advice is crucial in guiding them through the initial steps onto the property ladder.
Back to basics
There are a few golden rules when giving advice to first-time buyers. It may sound obvious, but a good broker should never assume a first-time buyer understands the significance of choosing between a variable and a fixed rate, what a MIG is or the various stages in the home-buying process.
The hand-holding service a broker can provide is seen as a benefit by many first-time buyers ‘ and it is an aspect intermediaries often underplay. The fact that a broker knows the lending criteria of so many products means a first-time buyer can be successful in securing a mortgage where they may previously have failed by going directly to a lender.
Regarding the service element, there is one specific point worth mentioning. Over recent months, we have noticed a growing number of borrowers ‘ many of whom are first-time buyers as they tend to be more mobile ‘ incurring problems because credit agencies do not have their details registered on the electoral roll. Following a recent local authority ruling, credit agencies are currently not receiving regular updates on electoral roll information. This is an unfortunate glitch in the legal interpretation of the Data Protection Act and one can only hope the Government resolves the problem sooner, rather than later. Although a broker cannot prevent their client from failing the credit score on this basis, they can at least ascertain the reason, therefore limiting the client’s concerns working around the issue.
It is apparent there is a sense of nervousness and reticence within many parts of the industry and the media surrounding affordability. Many see it as a way of justifying irresponsible lending. With an increasing number of mainstream lenders, such as Standard Life, Intelligent Finance and Nationwide, basing their lending decisions on affordability, it is a feature of today’s mortgage market that looks set to remain. Many economic forecasters take the view we have entered a sustained period of low interest, low inflation and therefore low interest rates. You should never say never in matters of the economy, but the prospect of us returning to the days of double-digit interest rates remain at least distant. Affordability is not any different to other lending criteria in that the borrower and lender both need to be satisfied the monthly mortgage payments can be met ‘ even when interest rates rise. Provided this principle remains central, there is no reason that basing a mortgage on affordability rather than strict income multiples should be equated with greater risk. If an individual has a good financial track record and a relatively high disposable income, it makes sense they should benefit.
If you think that scores of first-time buyers are out there picking up 100% mortgages and borrowing on income multiples over four times their salary, the latest Council of Mortgage Lenders (CML) figures serve as a good reality check. The average UK first-time buyer has an LTV of 79% and borrows 2.5 times their salary ‘ conservative borrowing in nearly any lender’s books. Security and peace of mind remain paramount, so the proportion of first-time buyers opting for fixed rates remains higher than the average borrower.
Having said this, it is true that for a reasonable proportion of first-time buyers, saving a 5% or 10% deposit presents a real problem. While it will always be true the larger the deposit the more choice you have, the cost of renting in many parts of the UK ‘ particularly the South East ‘ means that it is genuinely difficult for many young people to save. If presented with a choice between paying off expensive debts such as credit card and personal loan borrowing ‘ and saving a 5% deposit, some borrowers will do better to pay off their debts and take the best 100% mortgage on the market. Certainly, for those who do not have a deposit and have taken the decision that they want to be on the property ladder sooner rather than later, a good 100% mortgage offers a viable solution. The spectre of negative equity should never be dis-missed lightly, but the risk of significant depreciation in property values remains remote.
While interest rates remain low, borrowers on high LTVs in particular should make use of penalty-free overpayment facilities where they can. 100% borrowers should always try to avoid MIG ‘ which on a 100% mortgage usually works out at 3% of the mortgage amount. Lenders who offer competitive rates on 100% mortgages and do not charge MIG include Mortgage Express, Northern Rock and Scottish Widows, although the latter only lends to a limited range of professionals ‘ including teachers. Scottish Widows Bank is currently offering a five-year fixed rate at 5.99%, at which rate borrowers are only paying a small premium for the privilege of a 100% mortgage compared with what borrowers with a deposit would pay.
The right fit
Many first-time buyers are attracted to cashback mortgages. Although the prospect of cashback ‘ particularly when your recently purchased flat may look somewhat sparse and in need of furnishing ‘ is tempting, there are often cheaper alternatives.
Most cashback mortgages offer a set percentage of the mortgage amount that is paid on or shortly after completion. In exchange for the benefit of the cashback, the borrower would normally be committed to paying the lenders’ standard variable rate or a tracker rate for a set number of years, typically five ‘ so more often than not, the cost outweighs the benefit. While there may be a good reason a borrower wants to go for a cashback deal ‘ and it is true some cashback deals are better than others ‘ those interested should always consider alternatives.
When it comes to product innovation, two recent mortgage products deserve a closer look. Launched in February 2002, Newcastle Building Society’s guarantor mortgage breaks new ground in a number of respects. It offers a 100% MIG-free mortgage and allows a parent or close relative, such as a sibling or grandparent ‘ to be the guarantor and requires only enough income to cover the shortfall between the amount a borrower might normally be offered by the lender and the actual loan size. This is unique as other mortgages of this kind restrict guarantor status to parents. Other guarantor mortgages normally operate on the basis that the guarantor needs enough income to cover the entire mortgage loan, rather than just part of it, as well as their own mortgage. The guarantor can be released from the scheme at any point during the period of the loan when the borrower’s income has increased sufficiently to cover the full amount. The mortgage has a five-year fixed rate of 5.99% and borrowers need to be of professional status with a minimum income of £15,000.
The rent-a-room mortgage, available via The MarketPlace at Bradford & Bingley and funded by Mortgage Express, allows borrowers to add the rental income from letting one room onto their salary before their income multiples are assessed. The scheme, ideal for low earners, allows them to add £4,250 ‘ the rental income amount allowed tax-free under current regulations ‘ onto an income multiple of 3.25 times their salary or 2.75 times joint income. The mortgage does not have a MIG and borrowers can choose from any of the Mortgage Express deals, which currently include a two- year fixed rate at 4.79% and a two-year discounted tracker with an initial rate of 3.99%, both available to 95% MIG free. All Mortgage Express mortgages are flexible so borrowers can overpay which, for example, would allow payment holidays later to help cover any rent-free periods between tenants.
There have been an encouraging number of recent innovations and trends to help first-time buyers take their first step onto the property ladder. In particular, guarantor mortgages and buying with friends are proving increasingly popular. However, the pros and cons of any option always need to be weighed up carefully.
Ray Boulger is senior technical manager of Charcol
There are a number of products on the market to help first-time buyers, who do not fit traditional product requirements, to buy their first home.
Borrowing 100% of the property value can often be less risky than getting additional loans to fund a deposit.
Cashback products may help with initial costs, but often mean borrowers are tied into an uncompetitive rate for several years.