Following my last blog post before Christmas, it was great to see so many of you get in touch with questions around later life borrowing – so thank you – and please do keep them coming!
As this is start of a new year and decade, it felt right that my next piece should focus on a group who will have made a milestone resolution this year. You guessed it, first-time buyers (FTBs).
Now, I know this topic has been done before – and rightly so. But as we look back over the last decade, it’s important to see how the market has evolved and some of the challenges FTB’s face.
FTBs play a major role in the property market, accounting for nearly half of all new mortgages for house purchases. To understand just how important FTB’s are, without them the housing market would grind to a halt. We need FTB’s to buy at entry level so everyone else can move up and when they stop buying, the rest of the market feels the chill.
But rising house prices and stricter affordability rules have made it harder for aspiring homeowners to join the property ladder. So while nearly two-thirds (61%) of 25-44 year olds were homeowners in 2008, this dropped to below half (48%) in 2018. And compared to the start of the decade, we are seeing differences in the type of mortgage they need.
For example, while the average age at which FTBs buy has stayed at around 31 years old, the average mortgage term has increased by nearly 5 years over the same period to 30 years. In 2008, a mortgage that lasted 25 years was the norm but today, 30 is the new 25. Literally. And similarly, average income multiples have increased from around 3 times to 3.5 times over the period.
Interestingly, and on a more positive note, the average mortgage payment as a percentage of a borrower’s income has decreased since 2005 - from around one fifth (21%) to approximately 17% today. The key driver for this has been lower interest rates. The interest component of a mortgage payment stood, on average, at 17% of income in 2005. It now stands at just over 8%. The decrease in interest rates has therefore helped FTBs counteract increasing house prices, which has led to larger loan sizes and higher monthly capital repayments.
However, while lower rates are helping FTBs, affordability is still a problem for those trying to make that first step. Even with mortgage rates at historic lows, it’s the stress testing (used to demonstrate that as a borrower you could afford the mortgage if interest rates were to rise) that can be a stumbling block for many.
For example, a typical two-year fixed rate mortgage today might have interest rate of 2.4%, and at the end of the two-year period a standard variable rate (called an SVR) comes into effect which increases the rate to 4.3%. Lenders must apply a 3% stress to this SVR rate so monthly repayments would have to be stressed on a rate of over 7%.
The reason for this is to ensure that if the Bank of England’s base rate rose dramatically, borrowers could still afford their monthly repayments. So while the initial 2.4% is affordable, customers, other than those remortgaging without increasing the amount borrowed, have to prove they can afford a much higher rate. And this is unfortunately where applications can be rejected.
To help address this, lenders offer longer mortgage terms and lend to a later age so that the payment costs can be spread out over a longer period of time. This makes each monthly payment cheaper, but the downside is that more interest is paid in total over the life of the loan. Fixed rate loans extending beyond 5 years can also be used to avoid the stress testing requirement.
The other key issue facing FTBs is the need for bigger deposits to counter rising house prices, particularly in London. Again, to combat this, lenders have decreased the percentage deposit they are prepared to accept, with many now offering mortgages at 95% of the value of the property. But lenders will place limits on the amount of overall lending they will offer on these terms and typically charge higher interest rates to reflect the greater risk to them, so this does not resolve the issue completely.
After a mortgage rejection, it can seem like there are no alternatives – and it’s a pretty disheartening experience. There’s a reason why they say buying a home is one of the most stressful life events! There may be other options though and speaking to a mortgage adviser is a good place to start. You may be surprised and with their help you may find there are options you haven’t explored yet. Like us, a specialist lender, who can take the time to understand customers as individuals and considers their circumstances on a case by case basis.
If you would like to learn more or have any thoughts on this please feel free to email me at email@example.com
Vicki Harris has 20 years of experience working in challenger financial services brands, working across asset management, banking and specialist lending. She is Chief Commercial Officer of Kensington Mortgages, the UK’s leading non-bank specialist mortgage lender.