The plight of first-time buyers has been a hot media topic for some time. It’s widely acknowledged that many people who rent or live with their parents are finding it difficult to save a deposit or borrow enough at the traditional 3 x income multiple rate.
During the past few years, a generally buoyant housing market has seen a sharp decline in the proportion of first-time purchases. Over the previous 25 years it had fluctuated relatively narrowly between 45% and 55%. But in 2000 it fell below 45%, in 2005 below 30% and it plummeted to 10.4% at the end of last year, according to the National Association of Estate Agents.
So the industry as a whole has had to think creatively to ensure that the today’s first-timers can get on the ladder. Even with house price increases levelling off, they are still having to work hard to obtain deposits large enough to buy properties.
Recent research carried out by YouGov shows that around half of actual and potential first-timers either have no savings or intend to rely on friends, family or personal loans to get hold of deposits.
And the costs involved in house buying can be daunting. According to financial education charity Credit Action, a couple wanting to buy their first home will now have to save the equivalent of 81.8% of their joint income to build up the 32,784 needed to buy a typical home, including deposit and Stamp Duty.
So it’s very easy for first-time buyers to get into financial trouble, as the currently high personal debt levels indicate. As a result, lenders have had to take care when developing products to meet their needs.
Over the years, lenders have come up with a number of solutions, high LTV mortgages being one of them. These high LTV deals appeal to people who want simple and straightforward loans but have not yet saved deposits.
They are becoming increasingly popular with first-time buyers, especially as the interest rates attached are moving closer to standard mortgage rates.
Many lenders offer secured lending of up to 110% to help cover moving costs. More sophisticated high LTV lenders also offer an annual revaluation facility whereby deals are automatically recalculated using an in- dependent house price index, with customers’ interest rates being reduced accordingly.
This means that although customers may start with the maximum LTV, this is likely to fall annually as long as house prices continue to rise steadily.
In turn, this makes trading up a more viable proposition when the time comes to move on. Occasionally, lenders still charge a premium for high LTV borrowing but most have recognised that this kind of product is not inherently more risky than others.
Another way lenders have tried to encourage first-timers is to offer them more choice when it comes to how their loans work. Some offer secured mortgages at over 100% LTV and others have developed so-called hybrid loans which combine secured and unsecured elements.
Each has their advantages. Fully secured loans are straightforward and should be easy for borrowers to understand. They are linked to the value of a property, rather than personal circumstances. And they involve one payment at one mortgage rate, giving borrowers the opportunity to make relatively low payments, albeit over a long time.
On the other hand, hybrid loans allow borrowers to take equity in their property from the start. They also let borrowers keep the unsecured parts of the loans, even if they sell their properties and pay off their mortgages.
A big factor in their favour is they they are potentially less of a risk and offer more flexibility, as a loan is not entirely attached to a property and its value. Clearly, both types of loan have their part to play in giving first-time buyers appropriate options.
But the high LTV route is not the only one open to people wanting to buy their first properties. Some lenders – usually the larger and more mainstream ones – offer existing customers up to 5 x income, and sometimes more.
Although this helps first-timers to get hold of the funds to put in realistic property offers it does not overcome the deposit issue. And potentially it could cause problems in the future if borrowers are over committed on their mortgages, particularly if interest rates rise again. But in this game, nothing comes without risk.
Labour strives to care and share – but first-time buyers must beware
The government is taking the issue of first-time home ownership seriously too, particularly for key workers such as nurses and teachers.
Its HomeBuy scheme allows borrowers to benefit from lower initial mortgage payments and increased borrowing power in return for a share in rising prices, as lenders and the government keep a proportion of the property.
Initially, the scheme was only available to public sector workers but it now includes those people on council housing registers and, depending on where they live in the country, other groups who can’t afford to buy houses outright.
Last year, the government set up a shared equity task force to look at the needs of potential first-time buyers who may fall into the gap between renting and home ownership.
On the face of it, shared ownership seems a reasonable solution but the products can be complex and people unfamiliar with the mortgage process should take care to get independent financial advice before jumping in.
This will ensure that they don’t stumble across any nasty surprises in the future and also that they don’t get tied into products that are unsuitable for their needs.