First-time buyers (FTBs) can face numerous challenges in getting on the housing ladder. But there are signs that conditions are improving, albeit slowly.
One of the biggest recent hurdles has been higher mortgage rates, thanks to the Bank of England ratcheting up interest rates last year to curb inflation.
But mortgage rates have started to edge back down, on the assumption the base rate has peaked, and they could fall again later this year — although January’s unexpected rise in inflation could derail this trend.
Brokers point out that mortgage rate cuts were limited initially to lower loan-to-value (LTV) brackets, but a number of providers have started reducing rates on 90% and 95% LTV deals.
SPF Private Clients director Elena Todorova points out that, as well as lower rates, there is more product availability at these LTV bands — including new, longer-term, fixed-rate products. At the end of last year, she says, there were around 960 mortgage deals at 90% LTV and 440 at 95% LTV — according to Twenty7Tec — with a few more coming on stream since then.
The real benefit is that the rate at which borrowing is stress tested is the pay rate
“This is making life a little easier for FTBs, particularly those who put homebuying plans on hold last year.”
In mid-January, buyers with a 10% deposit could get a two-year fix at under 5.5%; three months earlier the cheapest rates at this LTV were just under 6.4%. For a five-year fix in mid-January, rates were around 4.5%.
Todorova observes that, although these current rates are lower than they were last year, they are much higher than two years ago. However, while brokers may hope that rates will edge even lower in the coming months, no one expects them to return to the ultra-low levels of the past decade. As several brokers point out, current rates are more closely aligned to longer-term averages, so FTBs should not expect significant cuts.
Stress testing
L&C Mortgages director David Hollingworth says FTBs need to look at more than the headline rates on introductory deals. The biggest hurdle for many, he says, is affordability — an issue exacerbated by the fact that many lenders ‘stress test’ affordability against standard variable rates (SVRs), now typically above 8% and broaching 9% in some cases.
Todorova says some lenders may apply stress tests up to three percentage points above the SVR to ensure that the loan remains affordable over the longer term. This means many mortgages become, on paper at least, ‘unaffordable’ — even if the buyer can easily service the loan during the initial two- or five-year period.
With an election looming, it will be interesting to see what the government comes up with in a bid to win votes
As Hollingworth observes: “This is putting downward pressure on how much FTBs can borrow.”
But lenders are taking innovative approaches to address this problem.
“We’ve seen lenders like TSB deploy a lower reversion rate for FTBs to allow more flexibility,” adds Hollingworth. “This gives FTBs the chance to borrow more.”
Opting for a longer-term fixed rate is another potential solution for would-be owners, he says. While longer-term fixes (of 10 years or more) have been available for some time, hefty early redemption charges (ERCs) throughout the fixed-rate period meant they were not popular with buyers, who risked being trapped on a higher payment rate if interest rates fell.
New product range
But Hollingworth says a new product range from Perenna offers an alternative that could appeal to FTBs.
“These products are fixed for the life of the loan and are available to 95% LTV.”
Unless a new scheme similar to Help to Buy emerges, FTBs will continue to face difficulties
The key attraction for FTBs, he says, is that there are no ERCs beyond an initial five-year period. At this point borrowers can switch to a new deal, or new lender, if rates have fallen, or stay put if this continues to represent good value. Importantly, this can help with affordability calculations. Perenna is offering a 25-year fixed rate at 5.75% (at 90% LTV with a £1,999 fee). This may allow buyers to borrow more than they could by stress testing against a cheaper two-year fix that reverts to a 9% SVR.
Hollingworth says: “Perenna’s proposition may offer higher borrowing amounts, potentially up to six times income to the right borrower.”
Todorova agrees that this is a useful additional option for FTBs — allowing them to borrow more and potentially purchase the home they want.
“The real benefit is that the rate at which borrowing is stress tested is the pay rate,” she says. “So for FTBs Perenna could stress the lending at something close to 6%, where another lender may stress at nearer 10% or 11%.”
Brokers say this offers another potential advantage: it reduces the risk of homeowners facing a significant hike in interest rates at the end of the introductory period — a problem facing borrowers who secured a mortgage a couple of years ago.
We often speak to FTBs who have underestimated the impact of credit commitments, so it’s key to speak to a broker as early as possible
Although many people worry about being ‘trapped’ on a high pay rate if interest rates come down, brokers say borrowers often don’t consider the opposite problem: the difficulties and stress caused by monthly repayments soaring at the end of the fixed-rate term.
Hollingworth says longer fixes, offered by the likes of Perenna, are a good halfway house.
“On the one hand they offer the peace of mind that rates won’t suddenly increase. But there is still the option to switch to a lower rate after five years if the market changes and mortgages are considerably cheaper.”
However, longer-term fixes won’t suit everyone.
“The main downside is that shorter-term fixes could still offer lower interest rates initially,” he adds.
Mortgage Finance Brokers mortgage and protection consultant Emma Miller says: “Most clients are not looking to fix for any longer than five years. The general consensus is that this [product] might limit flexibility.”
Whoever wins the election will be holding the baton on this, and we are going to need to see something innovative
With the smart money on rate cuts rather than rate rises in the near future, this may push buyers towards shorter- rather than longer-term fixes, Miller says.
“Buyers are aware that the market could change for the better and they don’t want to be stuck on a higher rate with hefty ERCs and miss out on more competitive mortgages,” she says.
Perenna isn’t the only lender innovating on product design for FTBs. Brokers point to Skipton’s 100% LTV mortgage, which takes a history of rental payments into its affordability calculations. Other options include the Barclays Springboard and Tipton Family Assist mortgages — both of which enable buyers to use housing equity from a parent (or other family member) or savings in a linked bank account in lieu of a deposit.
Fairview Financial Management director and chartered planner Ross Lacey says: “We’d love to see more innovation with mortgage products, particularly to help those currently renting to get onto the property ladder.”
Brokers can provide a valuable service helping FTBs to navigate these very different types of mortgage product, to see which is most suitable to their circumstances; whether it is a longer-term fixed rate, a family assist product or a conventional mortgage, which many FTBs still opt for, albeit with parental help to fund the deposit.
Perenna could stress the lending at something close to 6%, where another lender may stress at nearer 10% or 11%
“It’s almost always the case that FTBs have above-average incomes and/or a deposit that comes from an inheritance or is a gift from parents,” says Lacey.
Even with parental help, however, securing a mortgage is not always straightforward.
“We often speak to FTBs who have underestimated the impact of credit commitments on their borrowing capacity, so it’s key to speak to a broker as early as possible to understand what is viable,” adds Lacey.
‘Still a tough market’
Despite more choice of mortgage products, for many FTBs the core problem remains the rise in property values over the past decade, at a time when salaries have largely stagnated. Although house prices dipped last year, this has not made a significant difference to FTBs when it comes to basic affordability calculations.
The main downside is that shorter-term fixes could still offer lower interest rates initially
Rebus Financial Services co-founder Lee Gathercole says: “Property values have not dropped as much as many thought they might, so it’s still a tough market for FTBs.”
In addition, the government has withdrawn its Help to Buy scheme.
Gathercole says: “Unless a new scheme similar to Help to Buy emerges, FTBs will continue to face difficulties.”
Do brokers want a new government scheme for FTBs? While Gathercole is not against it, he says any replacement needs “serious consideration” as there is the risk that these schemes simply inflate property prices further, creating more difficulties for beleaguered buyers.
Peak Mortgages and Protection brand director Rhys Schofield says: “With an election looming it will be interesting to see what the government comes up with in a bid to win votes. The reality, I fear, will be some sort of short-term sticking plaster for a quick win.”
Perenna’s proposition may offer higher borrowing amounts, potentially up to six times income to the right borrower
Most brokers agree that the housing market should be a priority for whichever party wins the election, with longer-term reforms needed, particularly in relation to building new homes.
Many governments make promises on this front, but few have delivered in recent decades. Gathercole says only more fundamental reform, coupled with lender innovation, is likely to make a significant difference to the outlook for FTBs.
“Whoever wins the election will be holding the baton on this, and we are going to need to see something innovative. I wish them luck.”
