Colin 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 the 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.”
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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.”
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.”
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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.
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CD: “Sometimes you have to be pretty harsh with people and say you 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.
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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 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,” she says that some of it can be used to help with buying costs. “Most lenders including Halifax also have a range of help with costs options and also have products where there are no fees.”
Kate says that the biggest thing in terms of costs will be things like the stamp duty which are outside of the lendersÂ’ costs, so there are only certain things lenders can do to help, whether itÂ’s through a cashback or not charging any fees.
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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 that 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.
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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?”
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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 p
utting 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 pockets 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.”
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