Your questions answered

Owning a home can seem like a distant and unachievable dream for many would-be first-time buyers now that the average price of a first-time buyer home is more than £150,000. So we thought it was time to ask the mortgage lenders what they think about first-time buyers’ problems and find out what they have been doing to help out.

Government schemes

The government has introduced schemes to help first-time buyers such as the ‘key worker’ scheme and more recently the HomeBuy schemes. What else could the government do to help first-time buyers?

The lenders were in agreement that one of the main changes the government could make is to the stamp duty threshold, which currently stands at 1 per cent on properties over £125,000 and up to £250,000.AW:

“Stamp duty is always at the top of the list. There was a move in the budget before last where they raised it partly, but that’s not even at average house price levels”

KC: “Stamp duty is one of the highest costs that faces first-time buyers.” Kate mentioned that she recently heard a shocking figure that stamp duty costs in London average £7,500, compared with the rest of the UK which has an average cost of £1,500.

The lenders moved on to talk about other financial incentives the government could introduce to help out.

CD: “There are no subsidies for first-time buyers. It used to be they could get mortgage tax relief, but this was taken away.” Colin believes that if the government were to ask buyers what they want they would ask for some sort of tax relief or subsidy of the sort available in other European countries.

Shared ownership

Shared ownership in its many forms is becoming an increasingly popular option for first-time buyers, but the schemes have their drawbacks as the lenders explained:

CD: “We have an issue with some of the government schemes. Where they say they’re going to do it [build new properties] we’ve found that prices seem to be a lot higher than they said they were going to be at the outset.

AB: “That’s often a problem with government and local authority schemes. Frequently when these organisations are purchasing it tends to push the price up. It’s not as competitive a process as when a private industry is purchasing.”

KC: “And there’s also lots of stigma attached to shared ownership. A couple of years ago people wouldn’t even consider it.”

CD: “From my experience I don’t think a lot of them are and if you asked them I think they are more concerned about tax relief than other initiatives.”

AB: “I think the government schemes help by playing around the edges and all of these schemes help cumulatively, but the underlying problem is house price inflation. The root of the problem goes back the fact that incomes and house prices are totally out of sync”

How buy-to-let affects the market

Andrew Baum brings up the issue of buy-to-let and how it is often blamed for pricing first-time buyers out of the market in certain areas as landlords and first-time buyers tend to be attracted to the same types of property.

AB “The buy-to-let boom could be pricing out first-time buyers in areas of high demand. They could be bidding for the same properties which may be pushing up prices.”

Andrew suggests that the government could consider taxing second homes in rural or touristy villages and possibly buy-to-let in a different way to suppress the growth of the market in these areas.

AW: “We are a big buy-to-let lender and we’ve have looked into this and can’t find any evidence that landlords are pushing prices up. If anything buy-to-let has probably maintained the housing market through some difficult times.”

Andy feels quite strongly that taxing buy-to-let in a different way is not the way to go, given the fact that a lot of retirement provision is based on it.

AB: “I was looking at it purely from a first-time buyer perspective. Overall there are a lot of different economic and market factors to take into account

First-time buyers many not be competing with landlords in the way they were, as prices are now so high they simply can’t even get into the market.”

All lenders agree that the buy-to-let boom has resulted in better-quality rental properties.

AB: “There’s still a culture of buying in this country. We haven’t matched the European model where it’s quite normal to rent.”

Andrew believes this is part down to culture and partly to do with the quality of rental property that has been available in the past.

Do we need a change in buying culture?

First-time buyers are buying later. The average age of buying a first home is now early 30s. But this could be for a number of reasons and not just because they are being priced out of the market.

AW: “I think its true to say to some people are buying later because it takes them time to get a deposit together but they also buying later out of choice. They are more mobile and they move around in the early part of their career before they decide to buy.”

AB: “Perhaps the media distorts the reality. You read stories about people in their 20s who can’t afford to buy a home. It’s always presented as a problem. If people choose to rent it should not instinctively be seen as a problem.”

Andrew Baum suggests that we need a cultural shift towards it being acceptable to rent rather than rush to buy at a relatively young age.

AW: “People talk about renting being dead money, and this is one of the choices you have to make.”

CD: “I think what has happened over the last few years because prices have gone up so much, you’ve got people coming into the market with all these aspirations to buy and find they can’t.”

AB: “I think what’s tended to happened is that people have thought about buying as an investment – a way of making money rather than having somewhere to live.”

AW: “If you see it as somewhere you want to live, in a way it doesn’t matter. If you see it as an investment – this is where the ‘dead money’ idea comes in – in Germany 80 per cent of people live in rented properties and here it’s probably 80 per cent of people living in properties they own.”

The lenders agree that first-time buyers may need to rethink their expectations of buying and consider areas within a reasonable distance or commute of their work. This already happens around large cities where many people, not just first-time buyers, have been priced out of the centre. The lenders discussed what could be considered to be a reasonable commute in terms of distance and time.

AW: “I’m still not certain it’s quite as unaffordable as people make out, if they are prepared to be flexible about where they live. If you take your property hotspot and then drew a circle of a 10-mile radius or half a mile commute, you’d find plenty of places where people could live.”

It was agreed that the government would need to improve transport links to these areas and this would help lower-quality housing stock to improve.

AB: “This is where the government can really influence things by improving transport links to places of work.”

Products

Lenders have introduced a number of measures to help first-time buyers including increasing the amount of money they will lend, increasing the loan to value (LTV), extending the time over which the mortgage has to be repaid and introducing schemes where relatives can help. Is there anything else lenders can do?

Colin Dale finds it annoying that each time a new initiative comes out, such as 125 per cent mortgages, lenders get pilloried in the press.

AW agrees: “There’s a two-facedness in the media that accuses lenders of pricing first-time buyers out of the market, yet whenever we do something to help them then we’re called irresponsible.”

CD: “You’ve got a number of people round t
he table here and it’s probably their products and innovation and their competitiveness that has actually helped first-time buyers.”

AW: “I think there is a place for interest-only mortgages and I think that is somewhere where you could stretch affordability in the first few years as long as there is an absolute definite date where it turns to repayment – where you haven’t got a choice, so it’s a kind of stepped product.”

KC: “One of the downsides of interest only is that there is going to be a payment shock at some point.”

When lenders assess an application they look at a number of factors before deciding how much to lend and in many cases they are willing to ‘flex affordability’. This commonly happens when a borrower is training for a profession and the lender knows that the borrower’s salary will increase in future. But Colin has some concerns about doing this in the current market.

CD: “If you’re in the environment we are now where there higher interest rates and inflation we’re almost at the point where you have to ask if you flex affordability, where do you go from here? You can’t keep on flexing it. If you don’t budget for your rate going up you could be in trouble.”S

Stretched to the limit

In the first few years of owning a home many buyers may need to live within a strict budget. What can they do to keep costs down?

KC: “Take a fixed rate. We’ve seen evidence that this is happening as 80 per cent of our first-time buyers opt for fixed rates. It does help and it protects against payment shocks.”

CD: “The two-year fixes are going now. Some of our best sellers are seven and ten-year fixes.”

WM: “Even first-time buyers are fixing for that length of time?

CD: “Yes, they want some certainty especially if they are flexing their affordability.”

WM: “What about borrowers who are taking out 100 per cent plus mortgages. If house prices slow, or even fall, aren’t some of them in danger of ending up in negative equity?

AW: “High LTV (loan to value) mortgages are a way of first-time buyers buying without having to save up for their deposit. We’re a society that saves in reverse these days. People buy things on credit whether it’s a car or a house and then pay it off rather than save up for it. And those sort of products for those people that want to get on the housing ladder as quickly as possible are a perfectly valid way of doing it.”

KC: “Birmingham Midshires which is part of the HBOS group (Halifax Bank of Scotland), has gone into the 125 per cent mortgages. We don’t lend to everybody – only around half of those who apply will get the product. But we know they’re going to make those payments.”

AW: “If they are borrowing over 100 per cent the financial disaster comes when they stop paying, not the negative equity. Negative equity is not a problem until you can’t pay your mortgage or you need to move.”

Andy recommends taking out payment protection insurance, but to shop around for it and not just take the product recommended by the lender.

CD: “Sometimes you have to be pretty harsh with people and say they can’t do this. I think it’s important to be realistic and honest with borrowers and explain that their expectations are too high.”

WM: “Traditionally mortgages are taken out over 25 years, but some lenders have started to allow borrowers to take out mortgages for up to 40 years. This means that costs are lower as they are spread out, but borrowers end up paying interest for longer.

CD: “Some people can realistically afford it. We’ve just extended ours to 40. But you can take 40 to keep it low in the first few years. It’s better than somebody taking out a 25 or 30-year interest only mortgage.

KC: “If you take out a 40-year repayment term you can reduce that should you need to.”

AW: “When people are taking long-term mortgages, we look more closely at it [the application] the older people are. If somebody in their 40s is asking for a 40-year term, we’d look at that pretty hard.

Andy explains that it is a myth that lenders are encouraging people to take on risks. “We don’t make any money out of a mortgage that people don’t pay back. We make sure that people have the ability to pay the money.”

Costs

With interest rates going up and mortgage fees getting more expensive, what can first-time buyers do to help keep the costs down?

KC: “The key thing is to save. It’s common sense. We know a lot of first-time buyers will save 20 per cent to put down as a deposit, but you don’t have to put all of this down. [Some of it can be used to help with buying costs.] Most lenders including Halifax also have a range of help with costs and also have products with no fees.”

Kate says that the biggest thing in terms of costs will be things like the stamp duty which are outside of the lenders’ costs, so there are only certain things lenders can do to help, whether it’s through a cashback or not charging any fees.

Andrew suggests that best-buy tables can cause a problem as many of them show the interest rate rather than the true cost of the mortgage – the figure including the fees. He explains that Yorkshire is starting to move towards fee-free mortgages.

AW: “Mortgage fees aren’t increasing. It’s swings and roundabouts. There are bigger fees around, but for every £1,500 fee product there is a deal with no fee, but the rate will be a little bit higher if you don’t pay a fee.”

Andy says borrowers need to get advice. Somebody with a smaller mortgage should be going for a product with a lower fee. But if they’ve got a big mortgage (£120,000 or more) a low-rate product with a high fee might be more appropriate.

WM: “So how can borrowers compare mortgages?”

Colin explains that the cheapest deal is not always the one that looks cheapest on paper. “You have to work it backwards and think about what you need such as a free valuation or no higher lending charge.”

AB: “Some deals can be very complex. Ultimately the borrower needs to know what is the cost to them. If they are paying fees upfront can they afford those fees?”

AW: “As Andrew says, there may be some people who don’t have any money now who have to have a free valuation because a valuation costs £300 or £400, and if they haven’t got that they need to go and find a deal that lets them do that.”

Andy says that the way costs are calculated in What Mortgage (by true cost) is what buyers should compare. The three things to consider are; how much are you going to be paying each month? How much are you going to be paying in total? How long to intend to keep that mortgage for?

AW: “You need to ask: ‘What’s the cost going to be of this deal for as long as I have to stay with it? If you want to add the fee to the loan, how much is it going to add to it? Can I add any other fees in? What am I getting that I don’t have to pay out now?’”

If you want to keep your payments down as low as possible, over the long term it may cost you a bit more in fees.

Is now a good time to buy, or should buyers put off their decision to see which way interest rates and house prices are going?

CD: “We do have customers who are deliberately putting off buying. But you could have asked the same question every year in the past three years and people would always have said that the prices were going to go down and they haven’t.”

AW: “There’s definitely been a slowdown over the last few months.”

KC: “But we need to think where we’ve come from – we experienced record lending last year. All the indicators are still strong and I think that’s what you have to bear in mind. The context now is completely different to the 1990s. Employment is still steady.

AW: “I certainly don’t think we’re heading for a crash. We may get another interest rate rise, but that will be the top and then you will see fixed rates coming down.”

AB: “I’m sure there’s p
ockets of the country where houses are overpriced so there could be regional corrections. There may even be corrections amongst certain property types. City centres such as Leeds and Manchester have been flooded with small apartments and we’re reaching saturation point there.”

AW: “Should first-time buyers buy now or wait? It depends. They need to look at their circumstances, get some advice. And think about what’s likely to happen in the future. If they find a house that they like, then buy it.”

Andy says that first-time buyers need to aware of the places to buy. “Some places will be on the up and up and the thing to look there is, assuming you want to see some growth is thinking about transport links.”

AB: “You need to think that you are buying a home, somewhere to live, not somewhere as an investment. If you can afford it and you’ve set you heart on it, go for it.”