There’s an old saying popular among those who have been in the mortgage industry for a while. When applying for your first mortgage, how do you stand?
Answer: you don’t, you kneel.
This refers back to the days when owning your own home was not broadly considered a right, but a hard-won aspiration. First-time buyers scrimped and saved and went to their local community building society manager to ask for a mortgage.
I was reminded of this recently, following a report from the Building Societies Association, that highlighted just how much the mortgage market has changed since then.
It focused largely on the need for more flexibility on lending to those in retirement, but the research also laid out a future where first-time buyers would not be taking their first step up onto the property ladder until their late 30s or, more likely, early 40s. This future, they argued, is not too distant. This looks like it could be the reality facing would-be homeowners in just 13 years from now.
Separate research was also published this month by Legal & General, suggesting that the so-called Bank of Mum and Dad is set to be the UK’s ninth biggest mortgage lender by the end of this year – lending somewhere in the region of £6.5bn in 2017.
These studies reiterate what brokers know all too well – after decades of it getting easier to get a mortgage, it now takes more commitment, bigger deposits and better credit records than ever before to realise the dream of homeownership.
I think there is a tendency however to focus on the hardship involved, with this making for ‘better’ headlines in the national press. The reality is that getting on the housing ladder is still possible for a wide swathe of younger hopefuls.
1. Bank of Mum and Dad
This one is a bit of a misnomer – parents aren’t a bank and more often than not, they’re not lending via a mortgage to children. The vast majority of so-called Bank of Mum and Dad ‘lending’ is actually made up of gifted deposits. We see a good chunk of first-time buyer applications where parents or grandparents have given the applicant some or all of their deposit. This may be out of their own savings but not every family is so fortunate – or liquid – as to have several thousand pounds lying around.
This is where second charges are worth their weight – particularly if parents are reluctant to give up incredibly low lifetime tracker rates got before the financial crisis. Second charge rates have dropped significantly over the past two years, as have fees. For smaller capital raises, they are a viable and often competitive alternative option to a remortgage and allow parents and grandparents to give children a much needed helping hand into property ownership.
2. Help to Buy
The Government’s Help to Buy equity loan scheme is still in full operation – and will continue to be until at least 2020 - with thousands of hopeful buyers given the step up they need to realise their homeownership aspirations. The latest figures show that more than 259,000 people have bought a home using a Help to Buy scheme. Yet these loans still seem to be viewed as slightly second class to the traditional mortgage with many brokers who don’t specialise in them.
At Precise, we think Help to Buy is a critical part of the mortgage market and should be part of every broker’s arsenal to help first-time buyers. The scheme is available to buyers on new build properties and with the help of a five-year interest-free 20 per cent equity loan from the Government (40 per cent in London), borrowers with a 5 per cent deposit can benefit from the rock bottom mortgage rates reserved for those taking a 75 per cent loan-to-value mortgage. The high street lenders have a range of deals, but for borrowers with a less than perfect credit score, there are also options.
These are just two tools in a broker’s kit to help first-time buyers, yet both second charge and Help to Buy are still seen as specialist areas. But with house prices higher than ever, wage growth still under pressure and the spectre of inflation becoming less spectral every month, the financial reality facing first-time buyers is very different from that faced by first-timers even just over a decade ago.
Brokers have always helped first-time buyers make their dreams of owning a home a reality. Despite the tougher economic environment, this is still within their grasp – it just takes a little more imagination to get the finance sorted, something brokers have always proven good at.