Feature: Guide first-time buyers through tough times


At first glance, the housing market seems more intimidating than ever for first-time buyers (FTB). Prices have risen sharply in recent years – much faster than average wages – creating affordability issues for all buyers, but especially those trying to climb the first rung of the ladder, who don’t have of a cushion of real estate capital.

Although the real estate market appears to be cooling, forecasters anticipate a slowdown in price increases rather than a significant drop in prices themselves.

FTBs now also have to contend with higher interest rates – making mortgages more expensive – and the skyrocketing cost of living. This will potentially make saving for a deposit more difficult, and it could further stretch affordability calculations.

Even when mortgage rates have risen steadily for six months, it’s still cheaper to buy than to rent

Nonetheless, it remains a buoyant market, with FTB demand showing few signs of faltering.

L&C Mortgages Managing Partner David Hollingworth said: “FTB demand has remained strong despite these underlying challenges.

The numbers confirm it. According to the Bank of England, the number of FTBs, as a percentage of gross advances, decreased only slightly in the second quarter (Q2), from 24.7% in Q2 2021 to 21.4% in Q2 2022. This lower figure is broadly on par with that seen in the first quarter of 2021, which turned out to be a record year for FTB sales.

Connect Mortgage Director Jane Benjamin points out that at the start of 2022, FTBs still accounted for half of all home purchases with a mortgage, while last year FTB transactions topped 400,000. , i.e. 35% more than in 2020.

“Terrifying” rents

A number of factors are helping to support the FTB market. The first, and perhaps the most obvious, is that rental costs continue to rise, which can make buying your own home more profitable.

Peak Money managing director Rhys Schofield describes rents in many areas as “terrifying”.

Buyers may not be aware of the consequences of a hasty decision in order to secure the property

He adds: “Rental options are so expensive that even in a world where mortgage rates have risen steadily for six months, it is still cheaper to buy than to rent. This means that the aspiration to own your home is stronger than ever.

Changes in the mortgage market in recent years have also helped FTBs. Hollingworth points out that although the stamp duty holiday for movers ended last summer, the first-time relief has remained in place.

“It gives a reduction in expenses when buying [worth up to £5,000],” he says.

Lender flexibility, particularly around loan-to-value and affordability calculations, also helped, as did product innovation.

Your Mortgage Decisions director Dominik Lipnicki says there has been a welcome return of higher mortgage loans to the mortgage market in recent years.

“We have 35 lenders currently 95% provisioned, with a total of 182 programs, so availability looks decent for those with just a small deposit,” Lipnicki says.

We find that lenders are open to using higher percentages of variable income

Neil Bishop, head of commercial mortgages for the residential sector, points out that rates on many of these deals can be higher, of course, than those charged on low-ratio options.

“Current two-year deals at 95% LTV start at 3.69% and five-year deals start at 3.79% – although they change quickly depending on all mortgage prices.”

Bishop says these rates may be higher than what FTBs have paid in recent years, but they remain competitive on a longer historical basis.

“For most people, these rates should still be affordable, but given the rising cost of living, we are seeing more and more applicants opting for mortgage terms of 30 years or more to make monthly repayments longer. manageable. This term is then reviewed at a later date when their LTV has decreased, and we can advise and refinance their mortgage to a shorter term if affordable,” says Bishop.

SPF Private Finance Managing Director Mark Harris said brokers can help FTBs find the most appropriate option for their situation.

Much more popular than guarantor mortgages, family members give money to make up the difference in case of shortfall with the deposit

“The price of products available at the typical end of the FTB market has increased, but to a lesser extent than, say, the price of products at 60% LTV,” he says.

“There are also many more products and lenders than at the height of the pandemic, which means more options for different credit profiles looking to buy.

“Rising interest rates and the rising cost of living have all had an impact on affordability in recent times, leading in some circumstances to lower loan amounts. There are ways to potentially increase borrowing and lower monthly payments – for example, longer terms and/or longer fixed rate products – but, as with everything, there are also downsides.

Parental Funds

In addition to higher LTVs, there have been product innovations in recent years designed to help FTBs. Much of this has focused on Mom and Dad’s Bank, with parent funds also helping to support the FTB market.

“Lenders have long recognized that parents are an important part of many FTB hopefuls,” says Hollingworth.

We find that more and more applicants are opting for mortgage terms of 30 years or more, in order to make monthly repayments more manageable

He says more and more lenders are offering co-borrower, sole proprietor and family mortgages that allow parents to include their income in affordability calculations without incurring a stamp duty surcharge or potential tax. on capital gains. Guarantor mortgages are also available.

However, affordability can be tricky for some of these, and beginners should speak with an advisor or broker to make sure this is the best way to go, experts say.

Harmony’s director of financial services, Imran Hussain, says guarantor mortgages have not proven popular.

“Much more popular are family members who donate money to make up the difference in the event of a shortfall with the deposit.”

Other brokers agree that this is a common feature of the FTB market. Imogen Sporle, head of regulated and term finance at Finanze, said 99% of FTB mortgages she had recently taken out had at least some of the deposit offered by family members.

Meanwhile, Lansdown Financial Services director Doug Miller points out that if the Bank of Mum and Dad were a mortgage provider, it would be the fifth-largest bank in the market by funds lent.

There are many more products and lenders than at the height of the pandemic, which means more options for different credit profiles looking to buy.

Rising house prices helped the Bank of Mum and Dad provide some of these funds. But Private Finance CTO Chris Sykes says in his experience, parents often gift savings to children rather than taking the equity out of their own property.

A number of brokers say grandparents are also helping, with rising senior lending and the release of equity accelerating this trend.

Affordability calculations

Brokers agree that the focus will be on affordability. The rising cost of living could impact those calculations, but a change in the rules could ease the pressure a bit.

Lenders now offer some flexibility in this regard, according to Bishop.

He says, “We find that lenders are open to using higher percentages of variable income, including overtime and commission for pay-as-you-go employees, which helps affordability.

We have 35 lenders currently 95% provisioned, with a total of 182 programs, so availability looks decent for those with just a small deposit

A reduced stress test was implemented in early August. Harris says this allows lenders to use a lower minimum stress rating than before, which could impact affordability calculations.

“We still have to see how it plays out in the market. But it could help offset the challenges facing FTBs,” says Harris.

Others are less certain. Bishop says, “With interest rates and the cost of living rising across the country, I don’t see this having much of an impact in the near future.”

Brokers are also skeptical of proposals, mooted during the Tory leadership campaign, to allow lenders to consider an individual’s rental record when assessing affordability and maximum limits on ready.

Hollingworth says: “It’s been discussed before, but the market won’t hold its breath as lenders should think about how it might marry with the regulator’s affordability expectations.

“However, there are more options for tenants who want their lease payments to boost their credit profile and potentially bring positive benefits to their credit score. This is a positive step, but it will take time to grow.

Lenders have long recognized that parents are an important part of many FTB hopefuls

A slowdown in house price growth could benefit FTBs, including giving them more time to arrange financing before making an offer. Benjamin says brokers can help buyers avoid costly mistakes.

She says: “Arguably the biggest potential issue is low housing stock and FTBs clashing with experienced buyers and buy-to-let landlords. In some cases buyers may not be aware of the consequences of a hasty decision in order to secure the property.

“That’s the value of an advisor: helping our FTBs understand all aspects of their property purchase, making sure they achieve their ambition of home ownership and then can afford to keep their lodging.

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