The property boom has brought massive house price inflation, so affording a home is a bigger headache than ever. The average house price topped £156,517 in September, according to the Nationwide and since the average UK income was £28,780 last year, first-time buyers and existing homeowners alike are often struggling to find a mortgage based on as little as three times their salary.
Income multiples
Small wonder then that the average age for first-time buyers is now 34, according to Halifax research. And for buyers in the South, things are particularly tough, although surveys show a slight narrowing of the North-South gap as house prices in the North and elsewhere are also rising fast.
But dont despair, say insiders: lenders are far more flexible these days. In many ways weve started to come full circle as more providers have started to look at how much a borrower can afford to repay rather than using income multiples, says Rachel McKay, spokesperson at Moneyfacts.
Most lenders realise that income multiples are a rather crude measure of the ability to repay, confirms Christopher Dean, spokesman for the Council of Mortgage Lenders, so more complex and sophisticated risk assessment techniques are being developed.
Yet half of all consumers do not know that they can get a mortgage based on what they can afford to pay rather than on a multiple of their salary, according to research from Standard Life Bank. And that can make a huge difference, says Andrew Boddie, Standard Life Banks head of marketing. For many potential house buyers, being told they can only borrow three-and-a-half times their salary can come as a blow. For some, borrowing on a salary multiple would see them paying out less each month than when they were renting.
Affordability
So how does affordability work? Borrowers can simply use the Standard Life website to enter their annual salary and any other income, then deduct their financial commitments, and many find they can borrow more than they thought. And you can ask an underwriter to look at the calculations and potentially allow a stretch, says McKay. This means taking certain things into account, which may influence the underwriter to allow extra (stretched) borrowing. Larger mortgage loans may be offered if you have a large deposit, or work overtime and/or get regular bonus payments. These are included in the calculation and produce a higher credit score allowing more flexibility.
These factors can really work in your favour, says McKay. Lending based on affordability looks at what is left over from your pay packet after deducting all your outgoings. Income stretchers can be very useful but should always be used with caution and allowance made for emergency expenditure.
At the Building Societies Association, Rachel Blackmore agrees: You might have a dream home, but not be able to afford anything else.
A fresh approach
Lenders are increasingly flexible nowadays, says Britannia Building Society spokesperson Emma Taynton-Young. We use standard income multiples as they are easy to understand and provide customers with a real guide to how much they can borrow. But in recent years our multiples have been increased to reflect higher house prices and the lower interest rate environment. Our income multiples used to be 3 times for sole applicants and 2.5 times for joint, but now they are 3.5 times and 2.75 times respectively.
Yet Britannia also uses an affordability index that calculates the percentage of an applicants salary taken up by debt repayment (both mortgage and non-mortgage debts). Many lenders now use similar indices, though there is no standard formula, says Taynton-Young. So we use a combination of the affordability index and income multiples, along with the credit score and LTV. (LTV is the ratio of property price to mortgage borrowed.)
This kind of flexibility and increased income multiples has already made a big difference to plenty of borrowers struggling to afford the inflated prices in the pricier South Eastern and Western parts of the UK.
So are lenders becoming more flexible simply to keep their business levels up? No, says Dean at the CML: lenders are regulated by the Financial Services Authority, which encourages lenders to stress-test their products to make sure their loans dont put consumers at risk. Borrowers are also encouraged to carefully consider exactly what they can afford before signing on any dotted lines.
Research has shown that a debt test would be welcomed by first-time buyers, who may otherwise be unaware of the implications of their true financial position, says Dean.
Give yourself the best chance So if youre facing a potentially huge stretch to get onto the housing ladder, what can you do to help yourself?
Consider saving for a bigger deposit to cut your Loan-to-Value, says Taynton-Young: We also have a Homesaver account that is designed for people saving towards a house deposit. This gives an interest rate of-6.3 per cent, which exceeds the rate at which house prices are currently rising. Standard Life also encourages borrowers in the South East especially to consider lenders who are addressing affordability problems for borrowers and allow a stretch.
As well as saving for a deposit, borrowers can ensure that they maintain payments on their existing debt in order to keep a clean credit record, adds Taynton-Young. Reducing outstanding debt, say, on credit cards, rather than simply maintaining it is even better. Or consider Britannias Share-to-Buy scheme, which is an excellent way for first-time buyers to buy with friends and get onto the property ladder.
Or you could look at schemes like the Norwich and Peterboroughs Lend a Hand scheme, launched in August this year on all of its mortgage loans, which lets first-time buyers borrow more than standard income multiples by enlisting a parents help. Both the borrower and parents are jointly responsible for the loan, but only the child is named on the legal title, which allows parents capital gains tax exemption. Parents effectively top up their offsprings affordability with 1 x income, so for example, if the child can borrow £96,000 and the parents income is £34,000, the child may borrow £130,000 allowing them a £34,000 stretch.
Flexibility
Opting for a flexible mortgage, which allows borrowers to overpay on monthly payments, cutting down the amount of capital you owe your lender is another good way to reduce your debt more swiftly and even take a payment holiday without being penalised.
With any mortgage, whether capital and interest or interest-only where all you pay is the interest while you pay back the capital another way interest payments to your mortgage lender will far outweigh the original amount you borrowed to buy the property. So anything you can do to slash the cost of this interest is to your advantage. If your monthly payments are made up of both capital and interest, in the early years the interest ratio is far higher than the capital. But any overpayments you make immediately pay off the capital side of your loan not capital and interest like your monthly payments slashing the amount of interest you pay in total over the agreed term.
Borrowers can also opt for an offset mortgage, which allows you to put your savings into an account with your mortgage lender. You sacrifice any interest you may earn on your savings, but in turn the mortgage lender counts your savings as a reduction from the balance of the original loan, which reduces the amount of interest you have to pay the lender.
Advice
Getting some good advice will help you along your way. Consider using a broker to find the best deal. Multiple applications can leave a mark or footprint on your score, which may count against you, so bear this in mind, warns McKay. Registering a lot of
searches against your name is horribly easy, especially if you are shopping around for credit and this can damage your risk profile and make it harder to obtain a mortgage.
Keep your record clean, and make life easier for yourself. For while the prospect of buying a home might look daunting, it could be easier than you think as borrowers become more canny and lenders more flexible.
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