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Loan to income changes could shut first-time buyers out of 95 per cent market – analysis

  • 11/03/2021
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Loan to income changes could shut first-time buyers out of 95 per cent market  – analysis
The recent tightening of loan to income (LTI) multiples on high loan to value (LTV) products could end up blocking first-time buyers from the property market, brokers have cautioned.


The long-awaited return of more low deposit mortgages has coincided with LTI changes. This includes Halifax, Virgin Money and Platform restricting income multiples for the self-employed, those using Help to Buy, those earning less than £30,000 or those borrowing above 75 per cent LTV.  

At the same time, Accord, Barclays and Ipswich Building Society have all loosened maximum LTIs for borrowers with incomes above £60,000 by allowing them to borrow as much as 5.5 times their income.  


First-time buyer and self-employed shut-out  

Coupled with higher rates at upper LTV bands, Adrian Anderson, director of Anderson Harris said tightened LTIs could mean the mortgage market would not recover some of the business lost from first-time buyers last year.  

Data from Reallymoving showed the first-time buyer market contracted by 12 per cent last year as home movers and investors took a share of business activity while taking advantage of the stamp duty holiday.  

He said: “It will feel like they’re continuing to be punished. Those already on the ladder have likely benefitted from an increase in capital anyway, so maybe their income multiples don’t need to be so high.  

“For people trying to get onto the ladder and find a place they would like to live in, they will be in a position where even if they have a good income or two decent incomes, the increases in house prices mean they will still be paying a higher rate than someone who’s already on the ladder.”  

Anderson also said the volatility of self-employed incomes would make the process more “challenging”.  

“With some lenders it’s so critical how your last three of months trading went. You might have some self-employed applicants whose turnover is quite lumpy.  

“Quite often, when it comes to submitting applications for self-employed clients a lot of it comes down to the timing and whether they’ve had a good three months. If income multiples are lower and more questions are asked, it will be difficult for them,” he added.  


The haves and the have-nots  

Anderson said this proved the mortgage market was still weighted towards those who had more income and higher deposits, despite messages that help was available to borrowers with less capital. 

He said: “It’s all about the haves and the have-nots. Clients with bigger deposits will be at lower LTVs, so can get cheaper rates at 1.2 per cent or so, and with higher incomes can borrow up to 5.5 times loan to income.  

“But if you don’t have those things, you borrow 4.5 times your income and your interest rate will start with a three.” 


95 per cent LTV pricing  

While the re-introduction of 95 per cent LTV mortgages has been widely welcomed by the industry, the brokers acknowledged the overall costs of borrowing could turn some away from the products. 

David Hollingworth, associate director of communications at London and Country, said the pricing of 95 per cent LTV products could mean those with applicable deposits will need to rethink plans or turn to family help to close the borrowing gap.  

“We’ll have to wait and see what people have to pay [at 95 per cent LTV] and whether they’re prepared to pay that or if they would prefer to save for a bigger deposit,” he added.  

He said: “Throughout last year, borrowers would have thought ‘I need a 15 per cent deposit’ so they may have already been pushing hard to get that.   

“The emergence of 90 per cent LTVs would have helped and 95 per cent LTVs will help too. But recent changes to criteria will mean for some borrowers, delaying the purchase to increase their deposit might be of more benefit to them.” 

Hollingworth went on to say he was waiting to see how the 95 per cent LTV product pricing would take shape as the return of 90 per cent LTVs helped to “sharpen some rates up”. However, he added it might take time to see similar momentum for those with five per cent deposits.   

Jonathan Clark, mortgage and protection planner at Chadney Bulgin, said: “While we’re yet to see details of any of the new 95 per cent LTV products, the expectation is that LTIs could be anywhere between 4 to 4.5 times income and rates will be at least 3.5 per cent.    

“I don’t expect product fees to be any higher than 90 per cent LTV products – some may even be fee-free – as this would potentially only increase a lender’s exposure to little or no equity in the future.”  

Clark said he understood lenders were “shying away” from complex borrowers such as the self-employed or those with unconventional incomes as they take longer to underwrite and are perceived as being higher risk.   

However, he said lenders still needed to “adapt accordingly” with product offerings and criteria as these groups were accounting for an increasing proportion of the UK workforce.  


Negative equity concerns

With average house prices at record highs and exceeding £250,000, Clark said this was the first time in a long time he had been genuinely concerned about negative equity.  

He suggested stricter criteria, rates and LTIs could make borrowers think twice about purchasing a house right now.  

Clark added: “Buying a property has always been a major financial decision for anybody but now more than ever, people really need to consider it as a long-term home buying decision, as opposed to a short-term investment one.”  

Hollingworth said the difficulties for some to get a mortgage could be a blessing in disguise and added: “People need to always understand it’s not a given that house prices will keep rising.  


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