Prospective first-time buyers face the ever-increasing challenge of finding a decent-sized deposit and meeting mortgage lenders’ affordability requirements.
While many – but certainly not all – can rely on the Bank of Mum and Dad to help with the former, they still have to deal with meeting lenders’ different approaches to calculating affordability.
There are some positives for first-time buyers right now, however. While the mortgage market saw initial retrenchment from lenders at the onset of the Covid-19 pandemic, thankfully the majority of lenders who pulled their higher loan-to-value (LTV) products have now returned to this space. There have even been some recent reductions in rates in the 95% LTV area.
In addition, there are a number of government and/or industry schemes aimed at first-time buyers.
The latest initiative, the Deposit Unlock mortgage indemnity scheme, provides low-deposit borrowers with greater access to 5% deposit mortgages on new-build properties.
While this is be applauded and will certainly be of interest to certain prospective new entrants to the property ladder, my view is that mortgage lenders need to take a more rounded view towards affordability.
My proposal is for mortgage lenders to allow an applicant’s previous rental history to count when assessing affordability.
Rental conduct
Money spent on rent is often referred to as ‘wasted’, in that it’s not benefiting the tenant beyond providing them with a roof over their heads, compared to mortgage payments which provide the same security of shelter but also work to pay off the interest and then the capital.
With my idea, rental conduct would be used to assess whether the applicant can afford to keep up with mortgage repayment requirements. If, for example, a first-time buyer can afford to pay £800 a month in rent then why can’t lenders use this as a benchmark for what they can afford?
The multiple widely used to calculate whether or not a perspective tenant can afford to rent is the annual income divided by 30. Therefore, if a tenant’s income is £30,000 per annum, then the rental affordability will be £1,000 pcm.
Contrasting this to the mortgage affordability calculation, which is typically capped at 4.5 times annual income, the maximum borrowing available to a potential buyer on £30,000 income would be £135,000.
To illustrate this point, the table below provides the average house prices per region as at October 2021. It demonstrates average rents versus the cost of a 95% LTV mortgage for a first-time buyer purchasing a property in that region.
| Region | Average house price Oct 21 | 5% Deposit Needed | Average Rent | Indicative Mortgage Repayment |
| East Midlands | £228,290 | £11,414 | £742 | £856 |
| East of England | £332,216 | £16,611 | £1,031 | £1,246 |
| London | £516,285 | £25,814 | £1,752 | £1,936 |
| North East | £147,719 | £7,386 | £580 | £554 |
| North West | £195,325 | £9,766 | £844 | £732 |
| Scotland | £181,391 | £9,069 | £738 | £681 |
| South East | £366,883 | £18,344 | £1,123 | £1,376 |
| South West | £298,600 | £14,930 | £983 | £1,120 |
| Wales | £203,224 | £10,161 | £736 | £762 |
| West Midlands | £226,279 | £11,314 | £786 | £848 |
| Yorkshire and The Humber | £193,675 | £9,684 | £737 | £726 |
* Data Sources: Moneyfacts.co.uk, First-time buyer mortgage on a capital & interest basis on a 30 year term – HSBC, 2.49% Fixed to 30/4/2024 and for average rentals – https://homelet.co.uk/homelet-rental-index
What comes across loud and clear from the table is that the regions with lower house prices, and so those for whom the 5% deposit will be the lowest, are those who are paying more in rent than they would for a mortgage.
Equally, the disconnect between mortgage affordability calculations and average house prices is too broad which means the success of schemes aimed at first-time buyers is likely to be less significant.
With this proposal, clearly the borrower must be able to provide evidence of a good credit history but surely this is one way to increase home ownership and help first-time buyers with limited deposits get on the housing ladder?
It would certainly mean that aspiring first-time buyers’ rental payments wouldn’t be totally ‘wasted’.
If lenders decided to take this more holistic approach to assessing affordability then they could also help with the products they offer. In this instance, they could provide longer-term fixed rates mortgages – say for 10 years – in order to mitigate interest rate volatility for first-time buyers.
We’ve recently seen specialist lender, Kensington, offer fixed rates for up to 40 years, highlighting the willingness of certain lenders to design products to meet the requirements of these borrowers.
While this idea would almost certainly need the Financial Conduct Authority (FCA) to take a positive position towards it, the ball is in the lenders’ court.
If they demonstrated borrowers can afford mortgage repayments through their historical rental conduct, then with my proposal, the regulator would be under pressure to give it the green light.
Many first-time buyers have been quietly making their rental payments on time and in full for years – let’s not continue seeing these payments count for nothing.
Hiten Ganatra is managing director of Visionary Finance
