Ben Wilkie: Lenders have come under significant amounts of criticism over the past year – mainly around lending people more than they can afford to repay. Is any of this fair?
Jaedon Green: Let’s start with some context. Everyone looks back to the time when you had income multiples of three and a half times. and you needed a deposit of 10 per cent. On an affordability basis, interest rates have come down considerably and very few lenders, ourselves included, work on a multiples basis – we work on the genuine affordability of the individual.
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Chair: Ben Wilkie is editor of What Mortgage and www.themoneypages.com He has been writing about the mortgage and homebuying industry for around eight years.
Louise Cuming is head of mortgage and protection services at www.moneysupermarket.com She has over 20 years experience in the mortgage industry, and has worked at a number of different lenders before joining the online broker.
Jaedon Green is head of Halifax Acquisition at HBOS. He has worked in financial services for 19 years, and is responsible for the management of mortgage products, pricing and promotion at Halifax.
Martijn van der Heijden is head of mortgages at HSBC. He has worked in financial services in the UK for many years, including stints at Abbey and HBOS.
Pete Saxby is mortgage market manager for Bradford & Bingley and Mortgage Express. He has 17 years experience in financial services and has is now responsible for managing products for the Group’s residential mortgage business.
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If interest rates are half what they were it’s not surprising that lenders are willing to lend more. And if you look back to the height of high loan to value (LTV) lending last year, only five per cent of all lending was higher than 100 per cent. If you go back to 1990, about 35 per cent of lending was 100 per cent or higher. In that context, the excesses of 2007 don’t appear that great.
Louise Cuming: The real difference over the last 20 years is the needs of borrowers. People’s expectations in the consumer world weren’t quite as great. it isn’t the lender’s fault, we need to work together with the consumer, but the problem is with affordability is you can only work with what that affordability looks like at that minute. You can’t help it then if people after they complete on their mortgage then go and put £5,000 on their credit card.
Jaedon: If you tell someone they cannot have a mortgage and the reasons are affordability then a lot of people consider that to be a slap in the face. In some cases they should just consider it a warning. If the lender is not going to give you that money, it’s because you might struggle to repay it.
Martijn van der Heijden: In general it is fair that mortgages are scrutinised more than other products because they are so important in people’s lives. Giving someone a loan they can’t afford is pointless for everyone and the borrower certainly wouldn’t benefit from it.
In the UK we are responsible compared to the US and we don’t err on the side of caution too much like lenders do on the continent.
Pete Saxby: We will happily lend to first time buyers, they are the lifeblood of the market but there is no sense in us lending to someone who can’t pay us back. I would argue that if you are stretching either a high LTV or high income multiples for an appropriate price you are taking a worthwhile risk, but if you are stretching both then it’s not sensible.
Ben: How much of an impact has additional borrowing – student loans, credit cards and the like – had on the market?
Jaedon: It certainly has an impact on affordability. If you come to us with no other debts to service then we will lend you more. But if you got to pay x on a car loan you have to service that and I have to say can you pay your mortgage alongside it.
Louise: The problem is you can only measure affordability on what situation that person is in at that time. Afterwards, if they then say we need a new car, or have to go on holiday, then they’ll dust off the credit card that’s outside our control. That I think is the difference between 20 years ago because that practice wasn’t quite as prevalent.
Jaedon: You have a population that is increasingly coming to the market with student debts of a size not seen previously. You are also seeing a change in the profile of your first time buyer. We do a lot of research with first time buyers, trying to understand what is changing in their attitudes. We see with an increasing number of people leaving university, buying a house is no longer the first priority – they can change employers without the costs of moving home on a regular basis.
Pete: It’s affordability and attitude. Career paths are much more flexible and volatile, you’re much more likely to move around the country than the population was 20 years ago. Renting now allows you to follow your career.
Jaedon: 18 per cent of first time buyers were under 25 in 2007. In 1998 it was 31 per cent.
Louise: But then once you have got into this tenancy lifestyle it’s very difficult to save – saving a five per cent deposit plus your stamp duty is very tough.
Martijn: We are seeing a group of first time buyers are not entering the market – they are looking at the papers and saying, no way we’ll get a mortgage. We find one in five first time buyers are not buying now because they think they won’t get a mortgage when in fact only one in 20 has tried it and didn’t succeed. So 80 per cent of people who think they can’t get a loan didn’t even try.
Pete: Most lenders who have withdrawn from the high LTV mortgages will have done so with a fairly heavy heart because they are withdrawing from something they believe in.
Louise: I have complete support for 100 per cent mortgages. If you’re a graduate, or have been renting for a while, it’s ideal. But lenders will be pilloried at the moment if they take it to the market.
Jaedon: There are still schemes in the market like shared equity products, where the loans will end up being an equivalent of 100 per cent. They’re not right for everyone, but they are available and stimulating the market behind the scenes.
Pete: The 100 per cent mortgage does meet customer need. Whether it’s a graduate, someone who has rented for three years and hasn’t been able to save a deposit but has a track record of paying rent, or equally has student debts and has had to buy a car to get to their new job – it’s all about customer needs.
Jaedon: The issue around these sorts of products relates to the wider market. If you have rapid house price inflation then taking out 100 per cent plus loans – within a year it’s below 100 per cent. House prices were increasing at such a rate it was outstripping affordability. When you have house prices falling – as you do currently – but wages still rising, there should be less demand.
Pete: My rationale is that I don’t want borrowers coming the end of their deal in three or five years and finding that they’re trapped in a home that no longer meets their needs because of negative equity.
Jaedon: One thing you have seen this time around is those who have lent at high loans to value have continued to support their borrowers. Lenders who have done that deserve recognition.
Ben: Are lenders now much more conservative when it comes to both income multiples and loans to value?
Jaedon: We don’t use income multiples. We use affordability and stress test it. In terms of affordability that has improved. We have reduced LTVs. We’ve gone from 97 per cent to 95 per cent, which is very minor. When house prices are falling, lenders do pull back on LTVs. The challenge is not to pull it too far but to be realistic.
Louise: This is partly about education. People have got used to being able to go on holiday and have all the new things and service a mortgage. It sounds very old fashioned but you can’t do that!
Jaedon: We did some research amongst parents and their children, who were first time buyers.
The parents said they scrimped and saved for their first mortgage. The kids today want everything – the plasma tv, the dishwasher. They don’t know they’ve had it so good. When asked if they would help their kids, the parents said they would but won’t offer – they don’t want their kids to think they can have it on a plate.
When we spoke to the kids they said the parents always hark back to the hard times but the photos don’t show that. So the kids are asking if it really was any different. We asked if they would borrow from their parents and they said they would but they’re not going to ask for it!
So you’ve got a parent that won’t offer, a child that won’t ask and at some point they’ll work it out. Where the parental support is there, they are willing because they sympathise with the issues of buying a house.
Martijn: We do see first time buyers asking different questions than last year. It’s less, what’s the most we can borrow, and more, I want to buy this house, can I afford it. It’s much less about seeing who will lend the most.
Louise: As well as being able to afford the mortgage one of the things that first time buyers need to consider is the cost of the house. It’s not just paying your mortgage and the utility bills, houses do cost. And that can be a shock.
Jaedon: The valuers are out there and putting lower valuations on properties. And when the valuer comes back with a lower valuation, buyers take that as a slap in the face. Actually, what the valuer is telling you is in this market that property is overvalued. But rather than treating the valuation as a tick in the box, go back and use it to your advantage.
It’s so easy to get emotionally attached to a house and fall in love with it. But you have to take a step back and have a moment of rationality.
Ben: Do first time buyers fully understand the market? Are they doing their research before they start looking? Have Key Facts Information (KFI) packs helped?
Pete: I think the internet is superb at giving you a feel for what’s out there, and what you can borrow. There are first time buyers who do understand what they are getting into but I do think there is no substitute for individual advice.
Jaedon: People seem to feel that buying a home has no downside. Actually, it has risks. Part of the KFI documentation is to alert you to this – it’s not a heads I win, tails I also win scenario. You have to understand the product and you have to understand how this works.
Pete: The purchase of a mortgage is one of the biggest decisions of your life and you have to read the small print.
Jaedon: I like keeping things simple. I like to know what the monthly repayment is and a KFI will tell me that. Then I like to see what the fee is and I divide it by the number of months the product is available for. So if it’s a two year deal and the fee is £1,000 then it’s £1,000 divided by 24. I then add that to the monthly payment and that’s what it’s going to cost me.
Louise: There’s this obsession with not paying a huge fee but in certain circumstances the lower monthly payments are what the customer wants.
Ben: There has also been significant criticism of property investors – landlords were responsible for pricing first time buyers out of the market and are now responsible for both the credit crunch and falling house prices. Is this fair?
Martijn: Rational buy-to-let investors are not panicking and that is reassuring.
Jaedon: The UK has been building roughly 200,000 houses a year, with a demand for 240,000 new houses. So consistently we’re not building enough homes. By 2016, the population will be 4.4 million more than what we have now. So this shortfall is going to grow. Builders are now scaling back, but now is the time for them to build – lots of different stock at different price points. The demand is there.
Ben: Is now the right time for first time buyers to be looking at buying?
Martijn: If they want to live in a house somewhere and have the appetite to live in that house for the next five years they should definitely buy. I don’t think many first time buyers look at property as an investment opportunity. Ask yourself, do I want to live in this house and can I afford to?
Jaedon: Are you buying a property or buying a home? If you’re buying a home then that’s the right reason. If you love the property and it’s at the right price the chances are when the market recovers it won’t be available so your opportunity has gone.
Ben: How are shared equity products working in the market?
Jaedon: Often there is a stigma around shared equity and that’s completely unfounded. Because the typical person who buys shared ownership is likely to be a police officer or a trainee lawyer or accountant or similar, because they recognise they offer great value.
Martijn: We try to get everywhere we can and we are in a number of schemes and that I think is the crux of the problem. There are so many schemes, and all of them have slightly different criteria about who is eligible. It would be better if there were a couple of big schemes where the criteria have merged and then we would say we can compete in those.
Pete: I do think it’s somewhere that the wider market will get back into – the opportunities are there for both lenders and borrowers are huge.
Jaedon: Shared equity is not for the most vulnerable, it’s for those with prospects for career progression. If you’re not going to get career progression then shared equity is not for you because you won’t be able to go up the ladder to full ownership.
Ben: What about other schemes – buying with friends, guarantor mortgages etc?
Jaedon: If you’re considering buying a home with a friend, make sure your solicitor puts as much work into the agreement between you and the friend as they do with the buying process. Because of the two it’s your relationship with your friend that stands more chance of breaking down than the housing process.
Martijn: Parents have a place but smaller than the noise suggests. We’re seeing lots of parents wanting to help but the formal process of getting their names on the mortgage is a lot of trouble.
Louise: A guarantor mortgage has to be short term, so the parents can be sure the buyer can make repayments themselves after a couple of years. You have to be sure the guarantee isn’t just to make sure that the parents aren’t helping them borrow more than they can ever afford.
Ben: What would you like to see introduced to the market to help first time buyers?
Jaedon: I would like to see what you get in the Australian market. It recognises that first time buyers have it tough so at the moment you buy a house they will give you a cheque. It’s entirely up to you what you use it for – money towards a deposit, the first six months payments or the biggest tv you can get. You get this subsidy once, it’s for everybody and you don’t have to repay it. It’s a reason to go and buy a home.
Pete: That could help you address some of the issues you come up against after you’ve bought – any repairs, unexpected expenses and so on.
Jaedon: I would love to see first time buyers taken out of the stamp duty situation. That would kick-start the market. Lift the threshold, and make it so that first time buyers can buy without stamp duty, If you do this, you’ll see more first time buyers, more home movers and you’ll get the money back in the subsequent housing transactions.
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