Dear Delia

I am advising a young couple who are looking to buy their first home in the next couple of months.

They earn 19000 and 23000 and 23000 a year but this is likely to grow in the next couple of years. Before approaching me they did their research and are interested in getting an interest-only mortgage to keep the repayments down and then switching to a repayment mortgage in a couple of years.

Is this a wise option and what sort of deals are available? Delia says: There are a number of products specifically designed for first-time buyers. Here to help are Paul Howard and Brian Murphy.

Have you got a problem for Delia?
Email mortgage.strategy@centaur.co.uk

Intermediary Response
Brian Murphy is lending manager at Mortgage Advice Bureau
Due to the absence of specific information on your clients’ occupations, ages, future earnings or intended retirement dates I will have to make a number of assumptions as to their borrowing ability and the most appropriate repayment method and product.

Your clients could consider an interest-only option for a specific period with the stated intention to convert the loan to capital and interest repayment at some future date when the repayment is more affordable, but they must consider certain factors.

For example, we would need to establish with your clients their overall budget for mortgage repayment purposes and, assuming this is sufficient to cover the mortgage repayment, demonstrate the monthly differences between interest-only and capital and interest repayment.

If we assume the clients ideally wish to repay their mortgage over a 25-year period or earlier, adopting an interest-only approach from outset, the customer is storing up increased capital repayments for a future date. This may put pressure on their repayment ability at the time they convert their mortgage. We are assuming their incomes will rise at an accelerated rate and therefore this increased future payment should have less impact on their disposable income. A danger with this approach is that if your clients fail to convert their mortgage to a repayment basis at the time originally intended, the capital remains unpaid for longer, potentially resulting in repayment affordability issues when they make the change or maybe requiring them to increase their mortgage term.

Alternatively, if the repayment term at outset is 25 years and is felt to place too much pressure on clients’ budget, they could elect to increase the term of the mortgage but adopt a repayment basis from outset. This would cut the initial monthly repayments but increase their repayments in future, perhaps at the points their incomes start to rise substantially. This will allow them to pay down the mortgage early, saving significant interest payments.

I don’t know if your clients have a deposit or funds to cover the costs of moving. Again, assuming they have a 5% deposit plus the funds to cover moving costs, the type of product would depend on their attitude and feelings toward likely movements in interest rates.

Lender Response
Paul Howard is director of intermediary sales at Portman
As this is a couple buying their first home we cannot assume they have equity from a previous house purchase, and the first questions to ask are, do they have a deposit saved, and how much do they want to borrow?

The average cost of first-time buyer properties is 117,000, according to Council of Mortgage Lenders figures, so the couple shouldn’t have a problem affording a mortgage based on their joint income of 42,000. The mortgage market offers a range of products ideally suited to first-time buyers who have a deposit.

There are also a number of 100% mortgage schemes available for those who don’t have a deposit to put down. We have recently launched a choice of two, three and five-year fixed rate mortgages which not only remove the need for a deposit by offering up to 100% LTV but also offer the benefit of no higher lending charge and a free property valuation.

Turning to the issue of income multiples, these vary from lender to lender. In London and the South-East where property prices are substantially higher, the couple would need to talk to a lender with more generous income multiples. The couple should consider carefully their monthly outgoings and financial commitments and arrive at a realistic figure that they can afford to pay out on a mortgage each month. They could also look at taking out a guarantor mortgage with a parent or other relative acting as a guarantor.

We are told the couple have thought about taking on an interest-only mortgage but I would encourage them to consider a repayment mortgage. Although this type of mortgage will be more expensive, if they begin paying their mortgage payments on an interest-only basis, it will be harder for them to make the transition in later years to repayment.

By starting off on a repayment basis they have the option, should their financial situation change in the future- such as if one of them gave up work to start a family – to switch to an interest-only mortgage and reduce their monthly payments accordingly.

But both of them expect their salaries to increase in the next few years so if the time came that one of them had to stop working to look after children, the other’s salary may still be able to cover their outgoings.

As first-time buyers, they are much sought after by mortgage lenders and there are a number of products in the marketplace targeting their needs.

They should take their time and carefully consider all the options available to them.