I awoke (no one can ever call me woke!) to tweets, texts, and emails about a new guaranteed mortgage scheme that allows 95% loan to value lending, roaring up on the rails to help first time buyers. So, I thought I would put pen to paper or finger to keyboard and try and explain first time buyer lending.
Firstly, any assistance that makes it easier for a first-time buyer is absolutely to be welcomed. If a further 100,000 people come out of rent and own their homes well that must a good thing. (As long as my BTL landlords get new tenants in, of course!)
Where are we at the moment? Well, throughout most of 2020, the maximum loan to value was 85%, meaning a 15% deposit was needed. On a £160,000 purchase you would need to find £24,000.
Now, a loan of 90% is achievable subject to affordability.
And hopefully we will in March be at 95% meaning a deposit of £8,000 is needed.
Now you can see why its important. But time for a HHH “But” or “hold on”!
We have been looking after first-time buyers for long enough to know that many of them do have a 10% deposit from hard saving and very generous family gifts. Of course, this is great news for those that don’t, but what the headline grabbers ignored this morning was that the “affordability problem” has not been vaccinated away.
Let me explain. Our regulators, from 2014 onwards, made sure that mortgage affordability is key.
Stress tests were imposed, and mortgage professionals must do all in the powers to make sure a loan can be afforded and paid for wherever possible. This has had two big resulting outcomes:
People on lower incomes and/or with extra debt commitments cannot borrow silly sums (quite right too!) and the parental guarantor mortgage disappeared over night (albeit a few similar propositions are out there). People ask me “why”. Well, if the maximum mortgage term is to age 70 and guarantor Dad is 63 then affordability will need to be proven over 6 years and that is unlikely to happen.
You can now see the problem.
Really great to have 95% mortgages. Thank you, nice Mr Sunak. But house prices have powered on and earnings stayed steady for many, meaning it will make no difference because they won’t be able to get the loan they want. And, after all, a loan repayment that leaves you on baked beans, pot noodles and water every day is no long-term solution!
To be very fair many lenders, big and small, have tried to find an innovative solution to the problem.
At least two small building societies will take a charge over a relative’s house, but this just helps people with low deposits. It does not help the affordability issue.
A large bank will take a charge over mums’ savings. But at the risk of sounding like a broken record, same problem. The bank helps people with low deposits.
We have done many “joint borrower sole owner” loans. Usually, where the parents are young and in jobs where they could retire at greater than 70 years of age.
When a lender applies a term of 35 years for the young future owner and shall we say 10 years for mum or dad, then innovation really can make a difference and work. (Speak to your broker or adviser for more detail on that scenario).
I will now tell you what one leading high street bank will lend a couple earning £18,000 and £14,000 jointly with a car loan of £150pm and student loans of £75pm each and 1 child dependant. They would be able to borrow £124,830. I am not criticizing by the way, just stating fact here. The lenders must be prudent and work with guidelines set, as must we.
Also please note some lending loan to value restrictions, such as what a lender will lend on a new build flat, will stay in place. 95% loans are irrelevant in this circumstance, so much to ponder and discuss.
Let’s end where I started.
It’s great to see any help offered, but it remains tricky for a young borrower in many instances to borrow what they need. Advisers will look at every idea going, but the challenge remains. There is help out there and with the generosity of family and the skill of a good mortgage adviser, a happy ending often occurs. But for many this problem has not gone away with its tail between its legs today.