But with house prices reaching all-time highs, even those who have raised more than the minimum amount needed for a deposit can still be shut out if their income does not allow them to borrow enough for the property of their choice.
So, this week, Mortgage Solutions is asking: Would increasing loan to income (LTI) multiples up to a certain value be more beneficial for first-time buyers? And, do low deposit schemes create too much reliance on government intervention?
Increasing loan to incomes where prudent would certainly help more first-time buyers get onto the housing ladder.
While it is difficult for first-time buyers to save a 10 per cent deposit, another hurdle they currently have to overcome is the fact they are treated differently to other clients.
While it is hard to say whether it would be more or less beneficial than the government-backed 95 per cent loan to value (LTV) mortgages, it certainly would help more people onto the ladder.
The best way to support first-time buyers is for lenders to treat them like other clients.
While we understand there are regulatory restrictions for lenders, affordability is a better indicator of risk. By assessing affordability, rather than using strict loan to income multiples, lenders can accurately assess each situation individually.
This will take into account an applicant’s full circumstances, not just whether they are a first-time buyer. Then, lenders can increase LTI for clients who can afford it, not just those who are already on the housing ladder.
Rates for these increased LTI products should still be the same, as if the affordability checks demonstrate the client can afford the product, it wouldn’t be fair on customers to make them pay more.
While some may feel increasing loan to income multiples may be a risky move, this doesn’t necessarily have to be the case.
If lenders are assessing affordability, then it would actually be prudent of them to increase loan to income multiples for certain cases.
I think you need a mixture of both because you can have a low deposit, but the income still will not meet everyone’s requirements.
Now, people are elated at the fact they can have a low deposit but if the income multiple doesn’t work then they still can’t buy a house. The fact they have a low deposit is just one part of getting a mortgage.
The income multiples and stress tests are important as well as it still has to be responsible for lenders and fit within their criteria.
The 3x or 4x loan to income multiple is just a rule of thumb, but overall affordability will always need to be primarily based on the debt-to-income ratio.
Existing schemes do not make people with low deposits or incomes more reliant on government intervention because that has always been there.
The housing market has been overwatered politically, economically and socially. There always seems to have been some sort of government assistance.
We had the mortgage indemnity guarantee in the past and more recently of course, the Help to Buy and the 95 per cent loan to value (LTV) mortgage guarantee scheme.
Much of this support is there because of inflation and house price rises. Maybe if there was never any government intervention in the first place and we had a pure market, we would not be in a position where some people need additional help.
But because we have never had a pure market, government help is always needed.
From my perspective, the issue is far more about deposit levels than income multiples.
Our clients are predominantly in London and the south east of England and a typical first-time buyer has to spend around £500,000 or more on their first property.
With lenders favouring people with a 15 per cent deposit or more, that simply freezes out clients who don’t have that amount of money or can’t rely on family to help them.
If you use that as an example, being able to buy with a five per cent deposit or £25,000 is far more achievable than a 15 per cent deposit or £75,000. A mortgage is typically cheaper than what people are paying in rent, so opening up the small deposit market to new buyers is a great thing as the income is rarely the issue.
Lenders only pulled out of this area of lending due to fears of a house price crash following Covid-19, then they have been cherry picking the lowest risk clients ever since due to a lack of capacity that lockdown and other restrictions have created for them.
I don’t blame them for that, but it hampers the market if you freeze out first-time buyers.
I don’t agree that you should raise LTIs for first-time buyers though. I feel that affordability works on simple curve – the more you earn, the more you can afford to borrow.
Once you have cleared your utilities, food and essential costs, which are broadly the same for everyone, higher earners simply have a greater capacity to borrow more.
Pushing bigger loans on lower earners I feel would be recipe for disaster. I strongly suspect any government-backed guarantee will cap LTIs at 4.5 times income for that reason.